Equinor : Q2 2023 transcript

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EDITED TRANSCRIPT

EQNR.OL - Q2 2023 Equinor ASA Earnings Call

EVENT DATE/TIME: JULY 26, 2023 / 9:30AM GMT

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JULY 26, 2023 / 9:30AM, EQNR.OL - Q2 2023 Equinor ASA Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Bård Glad Pedersen Equinor ASA - SVP of IR

Torgrim Reitan Equinor ASA - Executive VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Alastair Roderick Syme Citigroup Inc., Research Division - MD & Global Head of Oil and Gas Research

Biraj Borkhataria RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst Christopher Kuplent BofA Securities, Research Division - Head of European Energy Equity Research

Giacomo Romeo Jefferies LLC, Research Division - Equity Analyst

Henri Jerome Dieudonne Marie Patricot UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst James William Hosie Barclays Bank PLC, Research Division - Research Analyst

Kim Anne-LaureFustier HSBC, Research Division - Head of European Oil & Gas Research

Martijn Rats Morgan Stanley, Research Division - MD and Head of Oil Research

Oswald C. Clint Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

Paul Redman BNP Paribas Exane, Research Division - Research Analyst

Peter James Low Redburn (Europe) Limited, Research Division - Research Analyst

Teodor Sveen-Nilsen Sparebank 1 Markets AS, Research Division - Research Analyst

Yoann Charenton Societe Generale Cross Asset Research - Equity Analyst

P R E S E N T A T I O N

Operator

Thank you for standing by. My name is Allie and I will be your conference operator for today. At this time, I would like to welcome everyone to the Equinor analyst conference call. (Operator Instructions) Thank you. Bård, you may now begin the conference.

Bård Glad Pedersen - Equinor ASA - SVP of IR

Thank you, operator, and good morning, everybody. It's a pleasure to welcome you to the analyst call for Equinor's second quarter result. My name is Bård Glad Pedersen. I'm heading up Investor Relations. I'm here together with Torgrim Reitan, Our CFO, and he will present the results before we open for questions, as usual. So with that, I hand it over to you, Torgrim.

Torgrim Reitan - Equinor ASA - Executive VP & CFO

Thank you, Bård, And good morning, everyone, and we appreciate you joining us, and I hope you all are enjoying your summer and that you also get some time for vacation.

So let's go straight to the results. We are delivering solid earnings this quarter with adjusted earnings totalling $7.5 billion and $2.2 billion after tax. The main explanation for the drop in results is, of course, that energy prices are significantly down from the extraordinary levels we saw last year. But compared to prior years, these are still solid results. Particularly, European gas prices are lower. And after a record warm winter, current storage levels in Europe are more than 80% full. Still, we see that the market is very sensitive to minor events and only small supply disruptions. And going

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JULY 26, 2023 / 9:30AM, EQNR.OL - Q2 2023 Equinor ASA Earnings Call

into autumn, we expect more volatility. Prices will depend on weather, impacting both heating demand and renewable energy production, and also Chinese and Asian demand competing for LNG will impact prices.

We believe this vulnerability will continue into this winter and for the coming years. Longer term, we expect to get more LNG into the market, and that LNG will be the price setter, providing fundamental support for higher gas prices. We take our role as perhaps the most important energy provider to Europe very seriously. And towards the end of this decade and beyond, we can deliver 40 bcm annually. We have a very competitive cost for piped gas from the Norwegian Continental Shelf, below $2 per MMBtu, and that puts us in a strong position.

This quarter, cash flow from operations continues to be solid. But as expected, and as we discussed in connection with first quarter results, our net cash flow is negative due to high tax and capital distribution payments, reflecting the extraordinary strong results last year. Cash flow from operations after tax year-to-date is $9.4 billion, positioning us well to deliver on average $20 billion per year, as we said, at our Capital Markets Update in February.

We see strong liquids production in the quarter. Both from the Norwegian Continental Shelf and internationally, it is actually up 12% in total. But our NCS gas production is lower than last year. It is down 14%. That is due to planned turnarounds, but also due to unplanned shutdowns at Hammerfest LNG and Nyhamna, impacting Snøhvit, Aasta Hansteen and Ormen Lange production in the quarter.

We also continue to deliver on our strategy across the business. In the quarter, we reached yet another milestone at Johan Sverdrup, increasing capacity to 755,000 barrels of oil per day, and this resulted in record high production from this field. And it will contribute strong with strong value creation for years to come.

In Brazil, we took the final investment decision for the BM-C-33 gas field, and we also continue to invest in our portfolio on the Norwegian Continental Shelf. This quarter, the development plans for Irpa and Verdande were approved. Both are subsea tiebacks in the Norwegian Sea and can be developed over the next few years, adding new high-value,low-carbon barrels.

Last week, we announced the acquisition of the Brazilian renewable energy company, Rio Energy, with a proven organization, a producing asset, delivering close to 1 terawatt hour per year and a solid pipeline of onshore wind and solar projects. And I look much forward to welcome our new colleagues. The acquired project portfolio is anticipated to deliver at the high end of the range for our expected renewables return of real 4% to 8%. And that includes the acquisition price. We are developing our portfolio in a country we know well, taking part in the largest power market in South America. This is similar to what we have done in other selected markets such as with Wento in Poland and BeGreen in Northern Europe. In the U.S. the lease for floating offshore wind in California has been approved. And here in Norway, Hywind Tampen is in production.

We continue to deliver capital distribution in line with what we communicated at our Capital Markets Update. For the quarter, the Board has decided an ordinary cash dividend of $0.30 per share in addition to the extraordinary dividend of $0.60 per share, totaling $0.90 in cash dividend. We continue our share buyback program. The third tranche will be $1.67 billion, in line with our program for 2023 of $6 billion. In total, we expect a capital distribution of around $17 billion for 2023, as we have discussed at our Capital Markets Update in February.

Okay. Turning to safety. We see that the serious incident frequency is 0.3. This is our best result so far. And also the total recordable injury frequency is down from 2.7 to 2.5. Safety remains our top priority.

We produced 1,994,000 barrels of oil and gas per day in the quarter, slightly higher than second quarter last year. In addition to record production at Johan Sverdrup, we also had strong liquids production from our international operations, particularly due to high production from Peregrino in Brazil and the partner-operated Vito and Cesar Tonga fields in the Gulf of Mexico. We have lower gas production this quarter, partly because we had more planned turnarounds, but also due to the unplanned shutdown at Hammerfest LNG and Nyhamna, impacting Aasta Hansteen and Ormen Lange. They are all back in normal production now, but the impact for the quarter was around 70,000 barrels per day.

On power production, 345 gigawatt hours from our renewable assets is slightly higher than last year due to 2 new solar power plants in Poland and Hywind Tampen being fully operational. We are now waiting for the start-up of Dogger Bank A, a milestone for the world's largest offshore wind farm. We are assembling the first turbines as we speak, and we expect first power later this summer.

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JULY 26, 2023 / 9:30AM, EQNR.OL - Q2 2023 Equinor ASA Earnings Call

Let me turn to our segment results. Adjusted earnings on the NCS totalled $6 billion, driven primarily by strong liquid production. It is a reminder that even if we are the largest gas supplier to Europe, we are also a large oil producer, and we create significant value from that. Internationally, good production growth drove solid results. Our U.S. business posted adjusted earnings of $226 million, while E&P International delivered $751 million. This includes the reversal of previously expensed exploration of $227 million. Our Marketing and Midstream segment delivered solid adjusted earnings of $665 million. This is within our increased guided range achieved in a quarter with lower volatility and with lower prices.

Our acquisition of Danske Commodities pays off, and we had received our first dividend of EUR 1.5 billion.

In our Renewables business, our assets in operation contribute with $33 million, but with high activity both within projects and business development, adjusted earnings are negative $84 million. We expect a further lowering of adjusted earnings in the coming quarters related to this segment as activity continues to increase. Inflation and global supply chain pressure continues to affect the industry. Transportation costs, high maintenance and activity levels and increase in CO2 prices contribute to increased costs compared to the same quarter last year. From first quarter, we see a fairly flat cost development, but we are prepared for continued cost pressure and strong cost management remains important. The reported costs for our operation in Norway are impacted by the strength of Norwegian kroner. Over the last year, Norwegian kroner has weakened impacting the results. Now we see that the Norwegian kroner is strengthening somewhat, and that will also impact our operational costs going forward.

In the quarter, we reported cash flow from operations of $10.5 billion and negative $356 million after tax, following two tax instalments in Norway of $10 billion in total. In the third quarter, we will pay one tax instalment of around $3.75 billion. In the second quarter, we also paid significant capital distribution of $6.8 billion in cash dividends and share buybacks, including $3.6 billion to the state for their share of previous tranches.

Working capital decreased by $2.2 billion, primarily due to lower gas prices and lower gas volume sold. After tax, capital distribution and capital expenditures, our net cash flow was, as expected, negative $10.8 billion. When that is said, our financial position remains robust with a strong balance sheet and cash and cash equivalents and financial investments of $42.6 billion and a net debt to capital employed ratio of negative 35%.

So let me then conclude by taking you through our guiding. We had unplanned production losses with an impact of around 70,000 barrels per day in the quarter. Despite this, we maintain our guiding of around 3% production growth this year. However, the risk is now more on the downside of this guiding. Organic CapEx so far this year is $4.6 billion, and we maintained the CapEx guiding we gave in February.

With that, I hand it back to your, Bård, and I look forward to your questions.

Q U E S T I O N S A N D A N S W E R S

Bård Glad Pedersen - Equinor ASA - SVP of IR

Thank you, Torgrim. We are then ready to open for questions (Operator Instructions) The first question will come from Teodor Sveen-Nilsen from Sparebank 1 Markets.

Teodor Sveen-Nilsen - Sparebank 1 Markets AS, Research Division - Research Analyst

I have two questions. The first is on balance sheet and dividends. Torgrim, as you alluded to, you still had a very strong balance sheet and one could argue that the balance sheet is a little bit out of sync compared to your long-term capital structure guidance. So I just wonder -- and also given the fact that the current oil prices and gas prices, that situation will most likely not change. So then my question is, would you prefer to accelerate your dividend, i.e., increase extraordinary dividends or increase buybacks going forward to get the capital structure in sync compared to guidance?

Second question, that is on gas strategy, gas sales strategy. I assume that we will see that the European gas storage now will reach 90% much earlier than previous years. So I just wonder how does that impact your gas sales strategy?

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JULY 26, 2023 / 9:30AM, EQNR.OL - Q2 2023 Equinor ASA Earnings Call

Torgrim Reitan - Equinor ASA - Executive VP & CFO

Okay. Thank you, Teodor, for two very important questions. So first on balance sheet. And as we have discussed earlier is that we have a very special situation after last year with extraordinary revenues. So that is the background for the $17 billion capital distribution this year. And I just want to repeat, we are very committed to deliver on that. And it's a composition between share buyback and cash dividend. So I'll give a little bit flavor on sort of our capacity to do share buyback because there are limitations to it.

One limitation is that we can just only buy back 10% of free float and that is the mandate that we have from the Annual General Meeting of 94 million shares. And that is the background for the $6 billion share buyback program that we have this year. And that level of share buyback, we are comfortable operating with. So as you understand, there is a limit to how much share buyback we are able to do on an annual basis due to regulatory limitations as such. We want to use a combination of share buybacks and cash dividends as we go forward as well.

So that's the first one. The second one, the gas sales strategy. Yes, the situation this year is, of course, very much colored by a record warm winter last year. That has softened prices quite significantly. But the situation is still very sensitive and volatile. But of course, coming into the autumn with high storages and all of that will make sort of the situation easier for Europe as we start autumn and all of that. But very small changes will -- can have the significant impact on prices. And I think we see on a daily basis 8% to 10% changes in prices just demonstrating the volatility.

So what we need to clearly follow closely is weather as that develops. If we see a normal winter this time around, things will look very differently. If there are supply disruptions that will typically have a significant impact if that be LNG or other value chains and of course, as Europe will have to compete with typically China and Asia for LNG, growth and demand in Asia will have a very important implication for the European gas market. So in summary, it is a very, very volatile situation. When that is said, we do know and we are probably the most important energy company in Europe. So we will help support Europe with energy through all of this. But if there are -- if the price tells us that the gas is more needed in a different period than we currently have, we will move gas in time and using price signals to do that as we have done in the past as well. So the gas strategy is the same. We will optimize for value and price signals is what actually defines where gas is needed the most at any point in time.

Bård Glad Pedersen - Equinor ASA - SVP of IR

Okay. The next question will be from Biraj Borkhataria from RBC.

Biraj Borkhataria - RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst

Caught my attention. Considering you bought this business for EUR 400 million...

Bård Glad Pedersen - Equinor ASA - SVP of IR

Biraj, sorry to interrupt you, but we lost the start of it. If you can start over again.

Biraj Borkhataria - RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst

Sorry about that. Hopefully you can hear me. So the Danske Commodities dividend, the EUR 1.5 billion, which is a significant number, I assume this is based on 2022 earnings. Looking forward, what would be a more normal level of dividends to Equinor for this business? And then the second question is on the reliability of gas production. Obviously, 2022 was exceptional. You've had a number of issues in Q2. Do you think these issues are largely behind you? And is there any theme there? And what contingency have you put in your production guidance for the year?

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