Earnings Call Transcript - EQNR Q2 2025

Operator, Operator

Thank you for being with us. My name is Kat, and I will be your conference operator today. I want to welcome everyone to the Equinor Analyst Call for the second quarter. I will now hand the call over to Bård Glad Pedersen, Senior Vice President and Head of Investor Relations. Please proceed.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Thank you, operator, and thank you to all of you for calling in. I'm here today together with our CFO, Torgrim Reitan. As usual, he will present our second quarter results before we open up for a Q&A session. As usual, we will keep this within one hour in total. So with that, I hand it to you, Torgrim to take us through the numbers.

Torgrim Reitan, CFO

Okay. Thank you, Bård, and good morning, and thank you for joining us. I hope you are enjoying your summer. Before we get to our results, let me draw your attention to the photo of Johan Castberg, a truly impressive project. Johan Castberg has ramped up to plateau production in less than three months to 220,000 barrels per day. The oil is of high quality, and we are now realizing a premium of around $6 per barrel compared to Brent. Today, we report solid financial results, driven by strong operational performance, new fields onstream, and strong production growth from U.S. onshore. We report adjusted operating income of $6.5 billion before tax. Our IFRS net income of $1.3 billion was impacted by an impairment on our U.S. offshore wind. I will come back to this. Year-to-date, our cash flow from operations after tax has been strong at $9.3 billion. Our adjusted earnings per share was $0.64. Energy markets continue to be impacted by geopolitical unrest, conflicts, and uncertainty around tariffs and trade wars. We have seen significant volatility in all markets. The European gas market is impacted by lower storage levels. Inventories are now almost 20 percentage points lower than last year and also well below the average of the last five years. Warm weather in Europe has, over the past weeks, driven additional gas-to-power demand. At the same time, we see storage filling in Asia, also driving demand and less LNG is now coming to Europe. In these times of uncertainty, we continue to focus on what we are able to control: our operations and how we maintain resilience. We are committed to cost and capital discipline, and we report a flat cost development in the quarter, which is our goal for the year. Our CapEx guidance remains firm, and our balance sheet remains robust through a lower price environment. Across the portfolio, we are making strategic progress. Johan Castberg reached plateau quickly, as I mentioned, we took the final investment decision on new Johan Sverdrup Phase 3 and Fram South in the Troll area. All of this supports longevity on the NCS, maintaining production levels all the way to 2035. Recently, we announced two large long-term agreements for the supply of gas to the U.K. and Germany. This demonstrates that large commercial players in Europe see the need for Norwegian gas for power production and for industry for decades to come. Internationally, we continue to optimize the portfolio. This quarter, we increased our U.S. onshore gas production by 50% based on the transactions we did last year, and we captured almost 80% higher gas prices. In Brazil, we have announced the divestment of the Peregrino field for a value of $3.5 billion. And we now focus our attention on the development of Bacalhau and Raia. We expect first oil at Bacalhau this autumn, and Raia, our domestic gas field is expected to start production in 2028. Within our Renewables business, we have secured a project financing package of EUR 6 billion for the Baltic 2 and 3 offshore wind farms in Poland. This is at favorable terms supporting double-digit equity returns. On Empire Wind 1, the stop work order was lifted in May, and the project is back in execution. This is positive, and I'm very glad to report that. However, we are making an impairment of $955 million in the quarter. The main driver for this is the changes in regulations for future offshore wind projects in the U.S. Part of the impairment is related to the undeveloped Phase 2 of Empire Wind. However, the largest portion is related to the South Brooklyn Marine Terminal. The development of the terminal assumed future projects would use it. This is now unlikely with the current framework conditions. This new reality is reflected in the updated book value for Empire Wind 1 and the South Brooklyn Marine Terminal. The impairment also includes the effect of higher tariffs on steel and a more limited amount related to the stop work order. The development we have seen leads to lower life cycle returns on Empire Wind. But the best way to protect value for our shareholders in the current situation was clearly to move forward with the project. And on a portfolio basis, our offshore wind projects in operations and execution still deliver double-digit equity returns. Then to capital distribution: for the quarter, the Board approved an ordinary cash dividend of $0.37 per share and a third tranche of share buyback of up to $1.265 billion, including the state's share. In total, we expect to deliver around $9 billion in capital distribution for the year, in line with what we said at the CMU. So let's dive into our results. Safety remains our top priority. We again deliver our best safety results with a serious incident frequency of 0.27 and a personal injury rate of 2.2. We continue to learn from incidents and work hard towards improvements. In the second quarter, we produced 2,096,000 barrels per day, up more than 2% from last year. We are on track to deliver 4% production growth for the year. On the NCS, our liquids production is up 4%, driven by the ramp-up of Johan Castberg and starting Halten East. High regularity on Johan Sverdrup and other fields had a significant impact. NCS production was impacted by planned maintenance and the shutdown of Hammerfest LNG. Our increased U.S. onshore gas production is around double the production loss from divesting Nigeria and Azerbaijan, which impacted our international production. We produced 1.1 terawatt hours this quarter. Renewable production increased by 26%, mainly driven by the ramp-up of Dogger Bank A in the U.K. Now over to our financial results. Liquids prices were lower than the same quarter last year, while gas prices were higher in Europe and the U.S. This has impacted our results across segments. Adjusted operating income in E&P Norway totaled $5.7 billion before tax and $1.2 billion after tax. Our E&P International business delivered higher production from Brazil and new wells in Argentina and Angola. Peregrino and assets under our U.K. IGD are classified as held for sale. This represents around $10 billion, and we do not report depreciation for these assets any longer. Our E&P U.S. results were driven by high onshore gas production. Also, there was a one-off related to an increased cost estimate in the abandonment obligations for Titan. MMP delivered solid gas trading, but results were below the guided range, impacted by the Hammerfest LNG maintenance and weaker crude trading. Our renewable results reflect higher project activity, but also significantly lower business development and early-phase costs. This quarter, cash flow from operations was $9.2 billion. Total taxes paid was $7.2 billion, driven by two NCS tax installments totaling around $6.8 billion. For the second half of this year, the NCS tax payments are expected to be NOK 100 billion. These taxes will be paid across five equal installments from August through December. This reflects a change from previously paying six tax installments to now paying ten annual tax installments in Norway. This quarter, we distributed $1.3 billion to our shareholders. Organic CapEx was $3.4 billion, and our net cash flow was negative $2.6 billion. We have a solid financial position with around $24 billion in cash and cash equivalents. Our net debt to capital employed ratio increased to 15.2% this quarter. This reflects the state's share of the buyback from last year booked as finance debt, impacting the net debt ratio by around 8 percentage points, as we said last quarter. The cash flow impact of this will be next quarter. At current forward prices, we expect the net ratio to remain around current levels towards the end of the year. Finally, to our guidance. We maintain the guidance we communicated at our CMU in February. Our progress is in line with those ambitions, both in terms of production growth and investments as well as capital distribution. So now back to you, Bård, and I look forward to the Q&A session. Please, Bård.

Bård Pedersen, Senior Vice President and Head of Investor Relations

And the first one on my list is Biraj Borkhataria from RBC.

Biraj Borkhataria, Analyst

The first one is just on the Empire Wind impairment and the impairment testing. The 3% discount rate, I think it's probably one of the lowest I've seen, and it looks a bit odd relative to sort of 10- or 30-year treasury. So could you just help give me some rationale as to why you use that number? And then the second one is on working capital. We had another release this quarter. You talked about the lower volatility in trading. I'm trying to understand whether this is a more structural level of working capital that we should be at relative to the last few years? Because, I guess, lower volatility means less capital for trading. What should we expect going forwards?

Torgrim Reitan, CFO

Thank you, Biraj. Regarding Empire Wind, I want to clarify that the 3% discount rate we apply is an unlevered and after-tax real discount rate. These are crucial factors to consider. For oil and gas investments, we use a discount rate that is 5.5 percentage points higher, indicating a significant difference between the two projects. The rationale for the lower discount rate for this project lies in its fixed revenue profile, which is secured for 25 years. We have conducted thorough analysis to support the discount rates we employ, ensuring they are consistent across our portfolio. As for your second question on working capital, it stands at $5 billion after a reduction of $550 million. This change is primarily due to movements in the upstream segments, not trading activities. In terms of whether this is a typical level, it has remained stable, particularly within the trading environment. However, while there is overall volatility, it's distinct from traditional volatility, as it's influenced by political decisions, making trading more challenging. This has led to reduced risk-taking across the trading landscape. Thank you, Biraj.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Next one on my list is Irene Himona from Bernstein.

Irene Himona, Analyst

My first question is about the new tax system in Norway. I want to confirm that all ten installments for 2025 are due over the five months from August to December. Is that right? Also, how will it be distributed into 2026? For my second question on gearing at 15%, you have now reached the low end of your range of 15% to 30%. Given that Brent is under 70% and considering the higher, yet unstructured, volatility, do you think aiming for 15% to 20% is more suitable than 15% to 30% when the Board decides on investor distributions?

Torgrim Reitan, CFO

Thank you, Irene. Regarding the tax structure, the payments will be divided evenly over the years. In the second half of this year, there will be five installments, and another five in the first half of next year. Payments will occur in all months except July and January. This approach aims to distribute the payments more evenly throughout the year rather than in six. This is a minor adjustment to the payment schedule, and we will inform you each quarter about the expected installments for the next quarter. I mention this because if you want to update your cash flow models, please do, and our Investor Relations team is available to provide further details as needed. As for the gearing at 15%, the 8 percentage point increase from last quarter is due to annual payments to the state linked to share buyback programs. We anticipate maintaining that level by the end of the year. It's crucial for us to operate with a conservative balance sheet and a strong financial position, which will continue to be our approach. We do not intend to change the range; it's not a target but is seen as consistent with our rating ambitions. There isn't a strict mathematical relationship involved. Regarding share buybacks, they are a key element of our capital distribution strategy. We have not tied our capital distribution to the fluctuations in cash flow from operations or free cash flow. Nevertheless, we are dedicated to staying competitive based on those metrics when comparing ourselves to peers. This may lead to periods of a stronger balance sheet and times of a weaker one. There isn't a strict mathematical connection here, and we don't view these limits as absolute. We aim to maintain a strong balance sheet and cash position, as you know we have been doing.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Next on my list is Alejandro Vigil from Santander Bank.

Alejandro Vigil, Analyst

Yes. The first one is about Brazil. Just trying to understand the timing of the Peregrino divestment. And also the Bacalhau project, the expectations of production next year. Trying to understand if the Peregrino divestment is going to be offset by Bacalhau volumes next year. And the second question is about the U.S. onshore gas business that has been a clear focus of your strategy recently. If you see more opportunities of growth there through acquisitions and also if you are planning some investments in the downstream, in the gas-fired projects, for example, to leverage the AI boom in the U.S.

Torgrim Reitan, CFO

Thank you, Alejandro. The divestment of Peregrino is significant and it's not finalized yet. We anticipate closing the deal by the end of the year. We're pleased with the price we achieved, as it creates value. The rationale for this decision is to focus on new developments, specifically Bacalhau and Raia, with some personnel transitioning from the Peregrino team to the new organization for better portfolio management. Peregrino has been well-developed, and we've put considerable resources into enhancing its quality. It’s an opportune moment to capitalize on that investment. Brazil continues to be a crucial market for us, and we will maintain our investments there, particularly in Bacalhau, which is progressing well. We're currently commissioning the remaining systems, with two drilling rigs active and two vessels working on subsea installations. Everything is on track, and we expect to have multiple wells producing by year-end at Bacalhau, contributing to production in the second half. Additionally, we’re planning extensive drilling activities for Bacalhau, which will significantly boost our international production. Regarding U.S. onshore gas, around a year ago, we made two acquisitions in the Marcellus play from EQT, substantially increasing our stake in that asset, adding close to 100,000 barrels per day of gas production under Expand's management. Since then, gas prices have risen notably, positively impacting our cash flow and earnings. We have a long-term belief in natural gas as a critical element of the energy transition and the ongoing electrification worldwide. The location of Marcellus gas in the Northeast aligns well with the U.S. drive towards establishing competitiveness in AI and data centers, with energy being key to the U.S. economy's future competitiveness. We're well-positioned for that. While there are no definitive plans regarding investments in gas-fired power plants, we recognize the increasing correlation between gas and power markets and are observant of developments in that area.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Next one is from Redburn. Peter Low.

Peter Low, Analyst

The first was just on unit OpEx costs in Norway. It looks like they've increased by around 10% year-over-year. Now I think part of that is just FX, but I'm not sure that explains all of it. I was just wondering what else was going on there? Does it relate to the cost profile of some of the projects that are ramping up? The second question was just, is there any notable maintenance or turnarounds expected in the third quarter that you're able to flag?

Torgrim Reitan, CFO

Thanks, Peter. Regarding NCS unit production costs, we observe that they have remained stable quarter-over-quarter at $6.7 per barrel. This presents a good opportunity to expand on cost discussions. Earlier this year, we stated our goal to keep costs flat while combating inflation and minimizing its impact across our portfolio. We are beginning to see the results of these efforts. Numerous initiatives and actions are underway to enhance efficiency in our operations and maintenance. We have significantly lowered early-phase business development costs, and our staff costs are decreasing as we have significantly reduced external hiring. This is reflected in our numbers; we have managed to keep costs flat on a quarterly basis, even with production growth. This will also be evident in the unit production cost. On the topic of turnarounds, I would like to mention Hammerfest LNG, which has been undergoing maintenance since the second quarter. We expect it to return by the end of July and resume production in August and September. Looking ahead to the upcoming quarters, we anticipate a turnaround impact of around 45,000 barrels per day in the third quarter, with a decrease to about 14,000 to 15,000 barrels per day in the fourth quarter. Therefore, the third quarter's performance is expected to be similar to that of the second quarter.

Bård Pedersen, Senior Vice President and Head of Investor Relations

We are then turning to Henri Patricot from UBS.

Henri Patricot, Analyst

Two questions, please. The first one, going back to the Peregrino disposal and the proceeds of close to $3 billion. How should we think about these? Is it mostly about strengthening the balance sheet or potentially opening up the potential for some acquisitions to replace Peregrino volumes in international E&P or elsewhere? And then secondly, on the two deals that you mentioned, Torgrim, in the U.K. and Germany on natural gas sales. Could you go through the benefits for Equinor of signing these long-term contracts and maybe also the rationale for sticking to spot prices rather than maybe finding another pricing mechanism that could reduce your exposure to spot prices in a few years when we could see potentially low prices as the market is supplied?

Torgrim Reitan, CFO

Thank you, Henri. Regarding Peregrino, the total value of the deal is $3.5 billion, with an effective date of January 1, 2024. It's important to note that there will be a delay in contract settlement as we aim to close the deal by the end of the year. Consequently, the proceeds we will receive are expected to be less than $3.5 million, depending on market prices. Additionally, we've generated a significant amount of cash over the past two years that will need to be accounted for in this headline number. As for whether this deal allows for potential future acquisitions, our approach to acquisitions and divestitures is primarily guided by strategic considerations and potential value creation. In recent years, we've executed several significant transactions, including divesting from Nigeria and Azerbaijan while acquiring interests in U.S. onshore operations. The Peregrino divestment is part of our strategy, and we are merging our U.K. portfolios with Shell to establish the largest operator there. Overall, we have remained very active in M&A recently, and we will prioritize maintaining a strong balance sheet regardless of our M&A activities. On the topic of gas contracts, it is crucial to highlight the appeal of Norwegian gas to the EU, driven by the need for long-term supply security. Over the past 1.5 years, we have signed three long-term contracts that cover 20% of our natural gas position on the Norwegian Continental Shelf and account for 6% of EU imports. These contracts are generally priced based on spot prices and include free sourcing, which allows us to purchase gas from the market as needed. This setup provides us with flexibility in our gas production without restrictions. It is important for our investors to have exposure to the European gas market by owning Equinor shares. We will continue to align our portfolio with a focus of 70% day-ahead pricing and 30% month-ahead pricing, ensuring that we can effectively respond to fluctuations in the European gas markets that could positively impact our earnings.

Bård Pedersen, Senior Vice President and Head of Investor Relations

The next one on my list is Teodor Sveen-Nilsen from Sparebank 1 Markets.

Teodor Sveen-Nilsen, Analyst

First question that is on listing. Could you please provide an update on listing, also maybe how listing's role will be in your ambition of keeping NCS production flat from 2020 to 2035? Second question, I just want to go back to the 3% discount rate used for impairment testing for Empire. I definitely understand there's a difference between the rate we use for impairment testing and rate to use for investment decisions still. I just wanted to explain the relation between the 3% you used for impairment testing and the 4% to 8% real return that you indicate as an ambition for renewal projects.

Torgrim Reitan, CFO

Okay. Thanks, Teodor. So listing is a promising discovery in the very north in the Barents Sea, as some of you would know. We are actively working to bring it forward to an investment decision. The investment decision might come next year or later. We do believe that the project absolutely has the characteristics to become a good development for Equinor in the future. When it will ultimately be sanctioned and put into production, we will have to come back to when, of course, we know more about that. Regarding the 2035 ambition and keeping NCS production flat, the main driver behind that is projects that we have concrete and specific plans for. We have more than 200 IOR projects that are currently being matured to deliver into that. We also have more than 200 prospects that we are maturing to get into that portfolio. This is sort of a risk portfolio, so it's very hard to say whether listing is in or out, but it is a natural part that we take that into the portfolio from a risk perspective towards 2035. When touching on that point, I am an old man, and I remember in the IPO in 2001, the concern with investors was, but NCS is declining. Why is this attractive? And here we are after 25 years, producing more than in 2001 and actually looking at the production in 2035 on the same level. It is a remarkable story of a basin that has kept giving. I used the opportunity for sales table, but anyway, it is an important part of the portfolio. On the 3% discount rate versus what we do for investment decisions. The discount rate that we use for these purposes is meant to mirror our cost of capital, a relevant cost of capital for these investments. We are clearly not satisfied with the cost of capital on investments, and we need a significant premium to that. For renewable projects, we want to see double-digit returns on the money that we invest the equity that we invest. So there is not a consistent application of those two concepts.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Next one is Paul Redman from BNP Paribas Exane.

Paul Redman, Analyst

Yes. My first question is regarding your preliminary remarks where you mentioned that you expect debt to remain flat at current levels. Could you clarify what assumptions are included in that expectation? Specifically, is there an assumption regarding working capital? How much inflow do you anticipate from Peregrino? I’d like to understand the steps involved in reaching that assumption. My second question pertains to the CapEx guidance of $13 billion for the year, which is based on an NOK rate of $11. What would be the impact if that rate decreases to 10? What effect would the exchange rate have?

Torgrim Reitan, CFO

Okay. Thanks, Paul. So in when it comes to net debt towards the year-end. So around current levels, I mean, we all know that prices can fluctuate. So in that statement, sort of based on where the prices are currently, forward prices as such and working capital assumptions in that are fairly stable working capital assumptions. The closing of Peregrino has two separate transactions there. We assume at least one of them to be on this side of the new year. The other one is a little bit more uncertain. That's why we say around because, I mean, there are so many moving parts there. I just want to give you some sort of guidance on that. The step up during this year is happening in the second quarter. After the second quarter, it is a stable development. Regarding your CapEx, yes, so $13 billion, we maintain that guidance, and we have used the currency assumption of $11 as you say. There is a certain part of investments that is in Norwegian kroner. It is hard to give an exact number, but around 30-ish percentage points, I would say, is exposed to Norwegian kroner. We will be a stronger Norwegian kroner; it has sort of a pressure into the number, but we work very hard to manage all of this. We have decided to maintain the guidance.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Let's move on to Michele Della Vigna from Goldman Sachs.

Michele Della Vigna, Analyst

Two questions, if I may. I wanted to refer back to your comment on maintaining a competitive cash return to shareholders and whether perhaps you could elaborate a bit more on what metric you're mostly looking at. If I look at your peers, most of them are using an operating cash flow payout. So I wonder if that would be something that you're referring to? And then secondly, thinking about some of the opportunities opening up globally, there is a very public process led by Galp on Namibia, which is one of the interesting new basins that are opening up. I was wondering if you're actively participating in that one?

Torgrim Reitan, CFO

Thank you, Michele. To remain competitive in capital distribution, we closely monitor what our peers are doing. Currently, our cash dividend stands at $0.37 per share, which we've increased by $0.02 each year, and we aim to continue this growth. The cash dividend is a crucial part of our distribution strategy, and we are committed to maintaining it through various market conditions. Additionally, we will implement a share buyback program to ensure that our total offerings remain competitive. While we don't have a specific formula, we recognize the importance of matching our peers' practices. We are open to utilizing our balance sheet strategically when suitable and are also committed to strengthening it when necessary. Regarding Namibia, while I can’t discuss specific details, I want to emphasize that our focus over the past few years has been on refining our international upstream exploration and production portfolio, which has proven beneficial. We prioritize deepening our presence in our established areas.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Next one on my list is Morgan Stanley, Martijn Rats.

Martijn Rats, Analyst

Many insightful questions have already been raised, and I would like to follow up on what you mentioned earlier regarding competitiveness. This aspect is very significant. As we all understand, there is considerable interest in the buyback for 2026. If the buyback is intended to be competitive, it also suggests that capital expenditures must be competitive. In an overall financial context, you can only achieve competitiveness in one area if you do something similar in another area as well. Compared to cash flow from operations, Equinor's capital expenditures are relatively high; the capital expenditure as a percentage of cash flow is much greater than that of many other European peers. I see that you are stating that distributions should also be competitive, but how is it possible for the distributions to be competitive when the capital expenditures are at a significantly higher percentage of cash flow from operations? How do we find ourselves in a competitive position then? Additionally, I wanted to ask about the buyback from a more technical perspective; do you plan to continue simply communicating the buyback for the following year at the full-year results, or might you consider providing more quarterly guidance?

Torgrim Reitan, CFO

Thank you for the question, Martijn. I'm glad you brought this up because it highlights an important aspect related to the Norwegian tax system that affects our comparisons with others. CapEx is calculated before taxes, while cash flow from operations is calculated after taxes. A significant portion of our CapEx is related to the Norwegian continental shelf, which allows for a 78% tax deduction as we incur expenses. As a result, our after-tax cash flow available for CapEx is notably lower. When comparing this figure to our peers, you'll likely arrive at a different conclusion. It's essential to evaluate this number alongside cash flow from operations after taxes. There are many details involved, and I'd be happy to discuss this further with you through Investor Relations. It's an important factor in understanding why our numbers may appear different from others, even though we share more similarities than it seems. Regarding your second question about buybacks, that topic isn't on today's agenda. Typically, any updates would be shared during a Capital Markets Day or similar event, but we don't have anything to announce on that front right now. If there are any new developments, they will be revealed at such an event.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Next one is John Olaisen from ABG Sundal Collier.

John Olaisen, Analyst

A couple of questions very quickly. What is your latest view on the timing of when Johan Sverdrup will come off plateau? And secondly, you talked about cost inflation and the fighting cost inflation. Do you still see the same cost inflation? Or has cost inflation come down? Is cost inflation about coming down a little bit? Are there differences between Norway and outside of Norway when it comes to cost inflation? I would assume you see some maybe some deflation in onshore in the U.S. So if you could comment a little bit on these things, that would be great, please.

Torgrim Reitan, CFO

Perfect, John. So first on Johan Sverdrup. This quarter, we had a very high regularity on Johan Sverdrup, actually 99%. There's a great job done by the organization to keep it that way. Production this year in 2025, we say that that's pretty close to the production levels we saw in 2023, '24, maybe around 720,000 barrels per day. There are a couple of things I really would like to underline here that are going very well. One is the work related to water management. As you would understand, as you produce these wells, there will be water produced, and our ability to manage water as that increases is extremely important. This is a core capability that we have done for 40 years. So that is going well. We are also now drilling or retrofitting multilaterals into wells we have drilled earlier and multilaterals several wells in one out of one wellbore. That is also producing well. Lastly, we made a final investment decision on Johan Sverdrup Phase 3 earlier this year. All of these elements have enabled us to increase our assumptions when it comes to recovery rates from 65% to 75%. It's going particularly well with Johan Sverdrup. The Phase 2 of Johan Sverdrup was designed to bring forward volumes at a very much higher level, but of course, coming off plateau earlier. I don't have a number for you, but I just want to leave with you that this has a high attention and we have our very best people working on these topics, and we will give you an update later on that. When it comes to cost inflation, we see that we continue to be able to take out efficiency in the organization and in the portfolio. It comes from scale. In our operations, we can put on new developments without increasing the organization and without limited cost. We are prioritizing very hard. We have a lot of opportunities, but prioritizing very hard and taking out efficiency across the more administrative or structural part of the company. So that sort of internal thing is going well. Looking outside at inflation, there is still a tight market within the oil and gas sector; still a heated market. A couple of points: we see that within drilling and well, the high-end floater market has softened a bit. We also see that within engineering and construction, it is tight in Norway currently due to the tax package, but that will drop off. We think the pressure there will come off in the next maybe 12 months, and also a little bit coming off in sort of the high-end floater market in Norway. When it comes to the yards and Asian yards, we see that is busy. We do think that will continue. There's a lot of FPSOs being built which leads me to subsea and marine, where we do think will remain tight because FPSO going forward. They always have a large subsea scope as such. To summarize, I think in Norway, there might be a little bit of easing when all this activity related to the tax package is coming off. Apart from that, it's a fairly tight market, John. So thank you very much.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Next is Kim Fustier from HSBC.

Kim Fustier, Analyst

I wanted to ask about operations and just that ramp-up on Johan Castberg was remarkably fast. I mean, was that ramp-up in line with your plan and your expectations? Or was it, in fact, better than expectations? And what did you do in terms of preparation or anything that made this ramp-up faster than others we've seen before?

Torgrim Reitan, CFO

Okay. Thanks, Kim. Yes, thank you for the question. Yes, it is Johan Castberg is a mega greenfield development. The fact that we were able to bring it on plateau in less than three months is remarkable. We had assumed in our plans that we should be able to go quickly, but we actually ended up doing it even quicker than we planned to. Johan Castberg is at 220,000 barrels per day at plateau production. It's going to be a significant contribution to the production growth this year and have a full impact in the second half of this year into the 4% production growth that we have put forward. The good installation of the ship and assets on the field has been crucial.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Moving on to Nash Cui in Barclays.

Naisheng Cui, Analyst

Just a follow-up on the cost inflation side. I think one of your Norwegian peers mentioned about CapEx cost inflation. I think you mentioned earlier that 30% of your '25 CapEx is exposed to Norwegian kroner. Just wonder how should you think about 2026 impact? You mentioned that you still want to keep the CapEx guidance. Do you have to give up any opportunities?

Torgrim Reitan, CFO

Thanks, Nash. Managing currency exposure is a natural part of what we do. We define ourselves as a dollar company; revenues are in dollars, accounts are in dollars, investments are largely in dollars, costs also in dollars. You should think about us as a dollar company asset. Then we manage fluctuations in other currencies like Norwegian kroner and particularly Norwegian kroner and so on. We clearly have the intention to tighten up the portfolio further, so we can stay within our current guidance even if there will be a little bit of Norwegian kroner exposure in there. That’s the plan.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Then it's Matt Lofting from JPMorgan.

Matthew Lofting, Analyst

Most of mine have been asked, but I'll just ask you, Torgrim, on MMP. I think you made some comments earlier around sort of the challenges in the recent environment around the trading businesses, with less appetite to take risk in the second quarter. How do you see the environment going forward from here, thinking about the second half of the year? Do you expect or see as we sit today any changes around that? And/or is the business in a position where, if it doesn't change, the setup and the exposures can be better adapted to work around it?

Torgrim Reitan, CFO

Okay. No, thanks, Matt. Yes, it's a good question. There are still a lot of value to be had within the trading environment even if the risk is different. I can give you a couple of examples. Within our gas trading, we see geographical arbitrage opportunities that are not linked to political risk in any way. For instance, with Russian gas now getting out of the market, we see higher prices in the East than in the West, and we have access to all these markets through our pipeline systems and contracts and all of that. Currently, we are actually selling more gas towards the East than the West, taking out arbitrage opportunities, and you’ll see that in the MMP result; you saw that in the second quarter. Also, based on your portfolio of oil qualities and shipping fleets and contracts, we can take out value from trading. This is sort of back to basics when it comes to trading and sort of asset-backed trading and physical trading; that will still continue. However, traders are struggling for the time being, and there's a little bit of risk on that part of the portfolio, something that we see across the whole trading community assets. Still quite a bit of value to be had, but the volatility is different now than it used to be, making it harder for traders to create value out of it.

Bård Pedersen, Senior Vice President and Head of Investor Relations

Thank you, Torgrim. There were a lot of questions today, but we have now passed the hour, and I want to be respectful of everybody's time. We didn't manage to get through the full list. However, the Investor Relations team remains available for calls during today and later in the week to follow up. We can conclude the call. I thank you all for calling in and for asking your questions. Have a good rest of the day.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.