Equinor ASA (NYSE:EQNR) is a Norwegian oil and gas refining company whose majority owner is the Government of Norway. This state-owned business was created nearly 50 years ago and is one of the largest oil and gas companies in the world.
Like the rest of the industry, the company’s market capitalization plummeted at the outbreak of the coronavirus pandemic. But with the world economy poised to recover from the virus thanks to two effective vaccines in 2021, is Equinor stock a Buy?
Equinor Faced An Unprecedented Oil Market
Equinor was created from a merger of Statoil and Hydro, which held down the Norwegian gas and oil markets through the back end of the 20th Century. It’s the largest operator on the Norwegian continental shelf, which gives the government control over one of its most valuable resources – fossil fuels.
As a state-owned business, the Norwegian Ministry of Petroleum and Energy holds the managing interest of the company. It also routinely acquires assets in other jurisdictions and is particularly interested in Russia’s oil market, in which it has yet to be successful. It does have assets in Australia, China, Canada, the U.S., Nigeria, Qatar, Valenzuela, and more though.
In addition to oil drilling and gas refinery operations, the company is focused on alternative energy sources, like wind energy and biofuels. It also maintains several oil pipelines throughout Europe that make it a vertically integrated company with capabilities to pivot easily into other markets.
However, its impressive assets aren’t enough alone to maintain profitability. It’s facing an unprecedented oil market that could be turbulent for several years coming.
Is Equinor Stock A Buy?
Equinor ASA’s market capitalization has been hovering around $50 billion recently.
Stock prices reached a 52-week high of $21.04 and a low of $8.41. They’re currently trading about halfway between, with a huge upswing during Thanksgiving week, thanks to two announcements of positive COVID-19 vaccines from Pfizer and Moderna.
This gives investors a good feeling about the economy reopening. Bulls are hoping the company will benefit from increased travel, both via air and road, along with more consumer demand driving the need for oceanic transport.
Because it’s a commodity-based company, even a wartime scenario could theoretically be good for the company.
Share prices were hovering between $25 and $30 in 2018. If the company can return to this glory through its investments, it has the potential to bring a 2x return to investors over the next five years.
However, the road to economic recovery won’t be an easy one.
Risks of Buying Equinor Stock
The biggest risk to Equinor is the global demand for oil and gas cutting into operating margins.
In a way, Equinor lucked out because it could easily shut down operations and shore up profits with a minimal staff. That’s only a short-term solution, however, and it’ll need to ramp back up production once global demand rises.
It’s unclear when and where this demand will rise either. The company needs to be nimble to pay attention to trends across the globe.
If it can identify these market trends, it can successfully navigate its way through a rocky path. That’s easier said than done though. Equinor’s executive leadership has its work cut out for it.
The company’s net debt ratio also increased amid the pandemic to 31.6 percent, which will bottleneck some of the company’s growth.
That debt will need to be reduced eventually. Even though it’s thriving in a low-price environment, the company’s long-term growth depends entirely on the return to normalcy, and it’s going to face a lot of competition from rivals.
Can Equinor Competitors Win?
Although it has a virtual monopoly in Norway, Equinor still has to compete with much bigger players in other markets it’s operating in.
As a state-backed entity, the company is also highly susceptible to geopolitical problems.
Should a country like China or the U.S. decide, they could ban the company from operating within their shores. This could prove detrimental to the company’s success, as other countries allow their own industries to surpass the capabilities of a leashed Equinor.
Of course, the tide has turned against the popularity of fossil fuels, given that they are a finite resource. As oil reserves are depleted, prices long term are likely to rise.
Even electric cars led by a buzzworthy Tesla (TSLA) aren’t enough to fully eliminate the need for crude oil. And the company can easily buy wind, solar, and other energy assets around the world.
Is Equinor Stock A Buy? The Bottom Line
Equinor is a state-owned oil company run by the Norwegian government. It took a hit when global lockdowns and travel restrictions choked the demand for oil around the world. But November saw positive signs of a return to normal life upon the announcement of two coronavirus vaccines from major manufacturers.
People will eventually return to traveling, although it’s not clear yet how long it will take. Revenues are down in a lot of industries and the oil industry has been among the hardest hit, but expectations are higher looking to the future. The company needs people to return to traveling by land, sea, and air if it wants to continue growing.
Otherwise, it’ll need to start buying other assets and acquiring new companies to extend its reach into other subsectors of the energy industry. Either way, the Government of Norway depends on it, and some investors are willing to take the ride with them.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.