Earnings Call Transcript - EQNR Q1 2024

Operator, Operator

Thank you for being with us. Welcome to the Equinor Analyst Call for the first quarter. I will now turn the call over to Mr. Bård Glad Pedersen, Senior Vice President and Head of Investor Relations. You may proceed.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, operator, and good morning to you all. My name is Bård Glad Pedersen, and I'm heading up Investor Relations in Equinor. As usual, I'm here together with Torgrim Reitan, our CFO. Torgrim will take you through our results first before we open for the Q&A, and we will keep this within 1 hour. So with that, I hand it to you, Torgrim.

Torgrim Reitan, CFO

Okay. So thank you very much, Bård, and good morning, and thank you all for joining us. I hope you all are doing well since we last met in February. So let's dive straight into the results. Today, we delivered solid financial results, driven by strong operational performance and production in a quarter with increasing liquids prices but lower gas prices than we saw last year. The solid results are also supported by MMP coming in above the guided range. From this quarter, we have introduced adjusted net income and adjusted earnings per share as new performance measures. We also renamed some measures to better align with industry practice and we no longer adjust for over- and underlift. In the quarter, we report adjusted operating income of $7.5 billion before tax and a net income of $2.7 billion. We delivered solid cash flow from operations of $9.7 billion and $5.8 billion after tax. And earnings per share were $0.96. We continue to make strategic progress across the portfolio. Earlier this year, we were awarded 39 new production licenses on the Norwegian Continental Shelf. We know that area well and we are confident that we will make new discoveries. We are cutting emissions while we invest. And recently, the Sleipner and Gudrun fields on the NCS were connected to power-from-shore. We reduced CO2 by 160,000 tonnes per year, leading to around $27 million in reduced OpEx on an annual basis. We recently announced high-grading of our U.S. onshore gas position through a transaction with EQT. We will swap our operatorship and interest in Ohio for non-operated interests in the Northern Marcellus Shale in Pennsylvania with lower breakeven, lower emissions, and also leading to increased production and profitability. Within renewables, we remain value-focused and disciplined as you have seen in the recent Norwegian offshore wind auction, Sørlige Nordsjø II. In that auction, we participated but we stopped at a bid level that would have created value. And we were okay not to win. Value creation is and will be our top priority. 2024 is the year of derisking for the Empire Wind 1 project in New York and we are progressing. After CMU, we were awarded a new offtake agreement with significantly better terms. Next, we aim to take an investment decision and secure project financing later this year. With a new contract and project financing, we expect a nominal equity return between 12% and 16% for our U.S. East Coast offshore wind portfolio. From there, we also aim to farm down and bring in a new partner, which will significantly reduce our CapEx. We continue with strong capital distribution, in line with what we communicated at our Capital Markets Update in February. For the quarter, the Board approved an ordinary cash dividend of $0.35 per share and an extraordinary dividend of $0.35 on top of that. As you know, we intend to grow the quarterly cash dividend by $0.02 on an annual basis. In February, we also introduced a 2-year share buyback program to increase predictability. The program is $10 billion to $12 billion in total with $6 billion allocated for 2024. For the quarter and subject to AGM approval, we announced a second tranche of up to $1.6 billion in line with this program. This tranche will start following the AGM in May. For 2024, we expect to deliver a total capital distribution of $14 billion, translating into a yield of around 17%. Turning to safety. In late February, we had a fatal helicopter accident, and we lost a dear colleague while 5 people were injured. We are working closely with authorities, and we have an ongoing internal investigation with a focus on helicopter safety and emergency preparedness. So although we have had a positive trend for safety performance, this is a very strong reminder to keep safety as our number one priority. Production was strong in the quarter, in line with our expectations and growing by 2%. The share of liquids in production increased compared to the same quarter last year. Our NCS production is driven by strong production efficiency and increased capacity at Johan Sverdrup and ramp-up of Breidablikk, an asset we started last autumn. Internationally, production grew around 3%, driven by partner-operated Vito field in the U.S. Gulf of Mexico, Buzzard in the U.K., and new wells in Angola. U.S. onshore gas production is somewhat down. Operators are now planning curtailment of production in response to lower prices. So we have not included this in our production guidance, which leads to a larger downside risk to our guidance. But the curtailment is done to create more value by prioritizing value over volume, and as you know, we support this. Power generation is up, and our renewables production is almost 50% higher than in the same quarter last year, mainly driven by the Rio Energy acquisition and the start-up of the 500-plus megawatt Mendubim solar plants in Brazil, where we own 30%. Offshore wind production also increased in the quarter. However, gas-to-power production from Triton was lower due to low spark spread. Now let's turn to our financial results. Oil prices increased through the quarter, while gas prices were down by actually 50% from the same quarter last year. Strong production drove E&P Norway's results, delivering adjusted operating income of $5.8 billion and $1.3 billion after tax. Our international E&P segments delivered around $1 billion in adjusted operating income, actually more than $800 million after tax, driven by production growth and a portfolio that has been high graded over time. MMP delivered within or above the increased guidance for the past 5 quarters, and this quarter, results came in above the range at $887 million. Strong liquids and LNG trading contributed to these results. Renewable energy assets in operation contributed with $46 million in the quarter. As we continue to build the renewables business, the adjusted operating income for the segment was negative as expected. Our OpEx and SG&A increased by 1%, while our production grew by almost 2%. However, we are not shielded from market effects, inflation, and cost pressure. Since our accounts are in dollars and the Norwegian krone remains weak, the impact is not easily seen in the accounts. There is underlying growth in OpEx, primarily driven by operation and maintenance, transportation costs, and increased activities within renewables and low-carbon solutions. We maintain a strong focus on cost control and prioritization, and we work closely with partners and suppliers on this. Over to our cash flow. This quarter, we have solid cash flow from operations of $5.8 billion after tax. We made one NCS tax installment of around $3.5 billion. Next quarter, we will pay the two final installments based on the 2023 earnings totaling around $75 billion, leading to higher tax payments in the second quarter than in the first quarter. At the Capital Markets update, we expected our cash flow from operations this year of around $17.5 billion after tax. Now, based on forward prices and including interest elements, we still expect to deliver around this level. Although gas prices are around $4 per MBtu lower than our CMU assumptions, oil prices are higher than we assumed. Next year, we expect to return to delivering around $20 billion in cash flow from operations after tax. Please note that our sensitivity towards changes in gas prices is dampened by the Norwegian tax system. As a general rule of thumb, disregarding the tax lag, a $4 change in the gas price approximately equals a $1.5 billion change in cash flow from operations after tax. This quarter, we spent $3.2 billion in cash dividends and share buybacks executed in the market. The state's share of buybacks will be paid in July, impacting our third-quarter cash flow. Our organic CapEx for the quarter was $2.8 billion. Working capital decreased by $3.2 billion, mainly due to lower gas prices and lower third-party and equity crude volumes at the end of the first quarter. After taxes, capital distribution, and investments, net cash flow came in marginally positive at $8 million. We have a solid financial position with more than $37 billion in cash and cash equivalents and a net debt to capital employed of negative 20%. As we said at the Capital Markets Day in February, we expect the net debt to become positive by the end of this year, and this still remains the case. Our guidance remains unchanged, but there is uncertainty related to commercial curtailment of gas within U.S. onshore. So with that, I hand it back to you, Bård, and I look forward to your questions.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Torgrim. We are now ready to begin the Q&A session. I see we have a good list of questions already. We'll start with Biraj Borkhataria from RBC. Please go ahead, Biraj.

Biraj Borkhataria, Analyst

I've got 2 questions, please. The first is on MMP and obviously, another strong result this quarter. I was wondering if you could help dissect the drivers and give a bit more color on the trading front because the volatility is obviously still high. But relative to the last couple of years, it's lower. So I'm just wondering is this Equinor taking on more risk than before? Or is there something else driving it? Just trying to understand the sustainability of these results. And then the second question is on Johan Sverdrup. There's some expectation that that field will come off plateau either later this year or early next year. Is it possible to give some color on what the next 2 to 3 years will look like for the field? Should we expect a relatively steady decline post-plateau? Or do we have a decline and reach another lower level of plateau or something else? Any incremental information will be helpful there.

Torgrim Reitan, CFO

Okay. Thank you very much, Biraj, 2 important questions. So first on MMP. Yes, let me try to give you a little bit more insight into that. Traditionally, gas trading has been the largest contributor to that result. Still, gas and power is delivering well with above $500 million in earnings. Crude is almost at the same level and they normally are not. Historically, they're at a lower level. We see that with Russian oil going to Asia, that creates a good opportunity for our portfolio and assets. That enables us to take advantage of the qualities we have in our portfolio. It gives us opportunities to trade in time dimensions and geographies as well. So those are the 3 elements that drive it. It's driven by the assets that we have with certain qualities, a flexible and large shipping fleet, and a trading organization that trades 24/7 around the clock with global books. That has proven to deliver well. On the gas side, it's still a good result. However, volatility within natural gas and the geographical arbitrage opportunities are less than in the last few years, but they continue to deliver well. On your question whether we take more risk, not really. This is asset-backed trading, and the speculative book is very limited. It's based on the underlying portfolio and assets and the flows. On your second question, Johan Sverdrup, yes. We expect Johan Sverdrup to come off plateau towards the end of this year or early next year. It's important to note that we have accelerated production on Johan Sverdrup significantly over the last years. In April, we qualified 750,000 barrels per day in capacity. Johan Sverdrup is designed and built for massive water handling with a very large water handling capacity. As we see, we have a bit of increasing water cut in the wells, that is expected. To work with the clients, we will drill new wells, optimize production and water management, and future phases like Johan Sverdrup Phase 3. We have put in one new well recently. There are two wells ongoing, and once those are done, there are more wells to be drilled in that reservoir. Johan Sverdrup Phase 3 is a tool to manage the client, and that is underway, with expectations to start up potentially in late '27 or '28.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thanks, Biraj. Next on my list is Teodor Sveen-Nilsen from Sparebank 1 Markets. Teodor, please go ahead.

Teodor Sveen-Nilsen, Analyst

Two questions from me. I just want to follow up on Johan Sverdrup. I understand that this is a complicated field with complicated operations. However, what should we model in terms of value production next year? Will it be 5%, 10% or 15% below the Q1 2024 production? Any thoughts around that would be useful. The second question is on the gas market and the gas value chain. In the long term, do you plan to take any additional positions in the LNG value chain from the U.S. to Europe? Or are you satisfied with your current position?

Torgrim Reitan, CFO

Okay. Thanks, Teodor. So on Johan Sverdrup, yes, it is a complicated field but clearly has significant potential for recovery. We have assumed a 70% recovery rate on that asset. The flow characteristics are very good. We are not ready to give you a rate that you can depend on for your calculations. But as the field comes off plateau, we will guide you on that development. The production guidance we have put forward for this year accounts for decline on Johan Sverdrup. Regarding the gas markets, we have seen very turbulent years in the European gas market, leading to a new reality. The European gas market has transitioned from being priced based on pipe gas to becoming an LNG-priced market. Our long-term expectation for price in Europe is based on competition for LNG between Asia and Europe, which we estimate to be around $10 per BTU in the long term. We already have significant exposure to LNG pricing in relation to piped gas in Europe. We have some third-party contracts with Cheniere in the U.S. but have no plans to build a significant LNG business beyond our current position.

Teodor Sveen-Nilsen, Analyst

That's clear. Can I just follow up on your guidance of 5% growth for 2026? How much of that includes the Sverdrup decline?

Torgrim Reitan, CFO

Thanks, Teodor. That's the same question as before. We can't provide a different answer, but we will keep the dialogue open. Development of Johan Sverdrup is on course, based on our ability to manage water, drill new wells, and optimize the reservoir and production characteristics.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Teodor. The next one is Martijn Rats from Morgan Stanley. Martijn?

Martijn Rats, Analyst

I have 2 questions as well. There was a headline this morning stating that Equinor sees additional risk to oil projects in the U.K. North Sea from the labor government if they come to power. Can you provide some color behind that comment? What risks do you foresee? Also, I would like to follow up on Biraj's question regarding MMP. I understand the comment about gas performing well as normal but would like to know why the oil trading results were surprising to the upside this quarter considering the diversion of Russian cargoes to Asia started back in 2022. Has something changed to enable these better results?

Torgrim Reitan, CFO

Okay. Thanks, Martijn. On your first question about the U.K., the industry relies heavily on stable and predictable framework conditions and tax systems. Any potential changes proposed by labor create uncertainties we need to integrate into our risk management and capital allocation strategies. The U.K. remains very important for us, and we will be diligent in ensuring a good link between risk and return. Regarding MMP and oil trading performance, the results from our oil trading portfolio depend on the quality of our producing assets, the differences in quality and our flexible shipping fleet and trading organization. Opportunities arise between quarters, so even with a good asset base, results can fluctuate. However, we have a flexible set of assets that enables us to capitalize on arbitrage situations when they occur.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Martijn. Next on the list is Michele Della Vigna from Goldman Sachs. Michele, the microphone is open.

Michele Della Vigna, Analyst

Congratulations, Torgrim, on the strong results. I have two questions. The first is regarding the impressive operating working capital release of around $3 billion this quarter. Can you share insights on how much of this might be structural or if it might reverse in the future? The second question relates to Empire Wind. You've laid out your thoughts on Empire Wind's pricing and how you're moving towards final investment decisions. Do you think we could see a farm-out this year, or might that come later in 2025?

Torgrim Reitan, CFO

Thanks, Michele. The reduction in working capital this quarter was $3.2 billion. Our current working capital level is around $5.5 billion. This reduction stems from lower gas prices, lower third-party volumes, and lower sales in March compared to December. It can vary per quarter, influenced by volumes, prices, and volatility. For context, in 2022 during high gas prices, we had $10 billion in collaterals, which is not the case now. I view our current working capital as a fair reflection of our current portfolio and market conditions. Regarding Empire Wind, I'm glad we received the new contract with New York State. The exact price hasn't been disclosed yet, but the average of two contracts was $150.5 per MWh, significantly better than the former contract at $118 per MWh. Final investment decisions are progressing, with contracts mostly settled and little inflation exposure left. We expect to farm down this asset at the right time, but I can't provide a specific date.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thanks, Michele. Next question is Kim Fustier from HSBC. Kim?

Kim Fustier, Analyst

The first one is a housekeeping question on the EQT deal in the U.S. Could you quantify the positive impact on production? More broadly, what does your decision to no longer operate anything in the U.S. onshore imply? Are there other regions where you might relinquish operatorship? My second question is about gas-fired power. You have the Triton power station in the U.K., and you're also expanding renewables positions elsewhere. Are there other countries where you find the need to acquire gas-fired power generation capacity in the future?

Torgrim Reitan, CFO

Okay. Thanks, Kim. So on the EQT transaction, it typically adds around 15,000 barrels per day in increased production. This was the last piece of operated activities within U.S. onshore. We've concluded that we don't see ourselves as future operators in U.S. onshore activities, prioritizing working with the best operators in the gas portfolio. Regarding CCGTs, they are essential in energy systems with increasing renewable and interruptible power, providing a link between natural gas and renewables. We're considering our CCGTs to be hydrogen-ready. An example is the MoU with RWE for 5 hydrogen-ready CCGTs in Germany, a key point for our natural gas to Europe.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Kim. Next question is Yoann Charenton from Bernstein.

Yoann Charenton, Analyst

I would like to ask about Johan Sverdrup again, if you don't mind. You mentioned the significant water handling capacity at the field and confirmed the production trend is in line with expectations. However, your largest partner indicated that this year's activity program will now involve drilling 10 production wells instead of the 8 planned earlier this year. For production to stay aligned with expectations, are you prepared to drill more wells this year? Can you explain why you're adding 2 wells to the program?

Torgrim Reitan, CFO

Okay. Thanks, Yoann. Yes, you're right. Drilling new wells is key to optimizing the production profile on Johan Sverdrup. Currently, there are two wells ongoing, and more will follow. We have said there could be up to 5 wells by the end of the second quarter. This is about planning and optimizing the field. As we produce and drill, we learn more about the reservoir and the placement of the wells. We’ll provide updates as we progress.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Yoann. The next question is Paul Redman from BNP Paribas.

Paul Redman, Analyst

I've got 2 quick questions. You mentioned curtailment impacts several times, but any idea on the potential impact of curtailment and recent conversations with EQT regarding how likely this would be? The second is a general question regarding the significant projects you have coming online over the next couple of years. Any updates on progress with Johan Castberg and Bacalhau?

Torgrim Reitan, CFO

Thanks, Paul. Gas prices in the U.S. are low, and operators typically hedge gas prices for some time. Gas prices have been low for a while, and these hedges are ending, revealing their actual exposure to underlying gas prices. Operators like Chesapeake and EQT will adjust activities to optimize for value. There are opportunities to choke production, which are being considered by these operators. I suggest keeping an eye on EQT and Chesapeake’s communications to gauge the impact on our portfolio; it’s still too early for specific numbers. We appreciate the decision to curtail production to create more value, as it will result in barrels returning at a higher price and earnings. On big projects, Johan Castberg is currently in the yard of Stord on the West Coast of Norway, with sail away planned soon. Most offshore work is done, reducing risk considerably. Bacalhau came out of the yard in China and is now in Singapore, with work progressing and first oil expected next year. We have inflationary pressures in Brazil but are prepared to manage these appropriately.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Paul. The next question is Henri Patricot from UBS.

Henri Patricot, Analyst

Could you share your views on the risk balance for European gas prices for the rest of the year and the demand recovery at this point?

Torgrim Reitan, CFO

Thank you, Henri. We had a very warm winter, and gas prices have decreased, stabilizing somewhat now. However, the market is influenced by temperature and high inventory levels. In April, inventory levels were 59%, very high compared to the 5-year average. European industrial demand is around 15% below the 5-year average but adjusted for temperature, we see about a 5% to 10% increase in demand over the last year for industrial and commercial assets. The European demand picture is significantly affected by temperature. Additionally, China's gas market has surpassed Europe's, meaning that demand growth in China has greater implications for European gas prices than European demand. Watch out for this trend. Other factors to monitor are the sanctioning of Russian LNG and Russian gas supply through Ukraine, which could end by year-end. Current price levels are high in historical context, and we can supply gas at $2 cost, making this a healthy business for us moving forward.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you. Moving to the next on the list, that is Jason Gabelman from TD Cowen. Jason, please go ahead.

Jason Gabelman, Analyst

Just one quick question for me. The international E&P tax rate was low for the quarter. Can you explain what drove that and what expectations are for that segment's tax rate moving forward?

Torgrim Reitan, CFO

Very good, Jason. Yes. In the U.S. segment, we reported a 25% tax rate and we guided around 22% to 30%. We saw deviation in the EPI segment, with a tax rate of 15%, below our guided range of 35% to 50%. This was due to U.K. tax assumptions and methodology.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Jason. Next one is Peter Low from Redburn.

Peter Low, Analyst

You mentioned an expected 12% to 16% nominal equity return for Empire Wind 1 after project financing. Does that include a successful farm down? Would it increase the returns further? Also, is the $17 billion cash flow guidance for this year including working capital, or is it ex-working capital?

Torgrim Reitan, CFO

Very good. The 12% to 16% does not include any future farm down. It reflects the current cycle up to this point. As for your question regarding cash flow guidance, yes, the $17 billion or $17.5 billion in cash flow from operations does not include working capital movements; that is before those adjustments. Any working capital movements will be reflected in net debt and the cash position.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you. Next one is Chris Kuplent from Bank of America.

Christopher Kuplent, Analyst

Torgrim, you've covered a lot of ground. Given the streamlining of your international portfolio, I wanted to check your feelings on the recent $10 billion discovery in Namibia. Does this present potential opportunities for you to farm into such discoveries, or are you considering adding new countries to your international portfolio?

Torgrim Reitan, CFO

Thanks, Chris. I'm not jealous about that. Congratulations to those who made that discovery. Hopefully, they can develop it well. In our international business, we focus on three countries where we wish to deepen our presence: Brazil, the U.S., and the U.K. We will continue exploring opportunities to strengthen our business there, while also optimizing our positions in places like Angola and Algeria. We've decided to divest our business in Nigeria and other areas where we believe it's better to redeploy our capital.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Chris. Next is Nash Cui from Barclays. Nash, your microphone is open.

Naisheng Cui, Analyst

Two questions, if that's okay. Firstly, you outlined a big payout this year and next, but a drop in payout for 2026 onwards. At what point do you start to assess whether your 2026 payout can remain competitive? Secondly, regarding MMP, you mentioned performance has exceeded guidance five times in a row. With potential for better underlying performance or improved trading volume, might you consider updating that guidance?

Torgrim Reitan, CFO

Very good. Yes, the significant payout this year and next is clear. We want to ensure a predictable ordinary cash dividend that will grow by $0.02 annually. There will be a $1.2 billion share buyback as part of our steady distribution. We aim to provide a competitive total capital distribution going forward and we have the flexibility to adjust spending to balance various priorities. As for M&P guidance, we recently updated it, and while I am pleased with the strong performance, we currently have no plans to revise that guidance.

Bård Glad Pedersen, Senior Vice President, Head of Investor Relations

Thank you, Nash, and thank you, Torgrim. We're fast approaching the hour, and I know it's a busy day for all of you. I want to thank you all for calling in and for asking questions. As always, the IR team remains available if you have additional follow-up after the call. With that, I wish you all a good rest of the day. Thank you all.

Operator, Operator

Thank you. This concludes today's conference call. We thank you for participating, and you may now disconnect.