1 Norwegian Oil Firm with Serious Upside

Based in Norway, oil and gas company Equinor (NYSE:EQNR) is far less well-known than oil majors like Chevron, Exxon and Shell.

Though far smaller, Equinor may be worth a look by investors at today’s prices because it appears to have substantial upside. 

Plunging Financials, But Light Up Ahead

In Q3, Equinor generated a net income of $2.50 billion on revenues of $26.02 billion, a considerable reduction over the prior year’s equivalent quarter in which the company generated $43.6 billion. Cash flows from operations plunged 20%, and adjusted earnings nosedived by 67% to $8.02 billion.

Despite these headwinds, Equinor could be positioned for a bright future. To begin with, much of the reduction in revenue can be attributed to lower oil prices.

Compared to the year-ago quarter, Q3 saw Brent crude prices that were about 14% lower. Such year-to-year price swings can slow down large oil companies, but they rarely result in significant long-term disruptions.

Equinor is forecast to grow over the next year with earnings up by 9.8% annually for the next five years and analysts expecting this coming year for a 14.5% hike.

Management has made a concerted effort to focus on renewable energy and is investing heavily in diversified energy projects, such as offshore wind, that benefit from government subsidies to make them more economical.

In that field, the Dogger Bank offshore wind project is expected to power 6 million homes when it comes online in 2026.

But green energy isn’t the only focus, and management is well aware what butters the bread currently, black gold. On that front, new oil resources are expected to be drilled in the United Kingdom’s Rosebank oil and gas field, set to come to fruition around 2026-27, and lead to an estimated 245 million barrels of oil.

Liquefied natural gas is a further area of focus that could drive higher revenues and boost the bottom line.

The net result from these efforts has been solid financials with the company reporting net margin of 15.3%, which compares well to its rivals, Exxon and Chevron coming in at 11.6% and 12.1% respectively.

Is Equinor Stock Undervalued?

Equinor stock is undervalued by 20.1% according to the consensus estimate of 5 analysts who have a $36.98 price target on the firm.

The range of analysts estimates spans $33 to $43 per share, suggesting the majority of analysts are leaning towards the low end of the range.

Interestingly, a discounted cash flow forecast analysis is a bit more upbeat but still falls within that range. The DCF reveals fair value sits at $40.56 per share.

One metric that really stands out for Equinor is the price-to-earnings ratio of 5.2x suggesting the company is very much on sale at this point in time. And trading at a price-to-sales ratio of just 0.8x further validates the investment thesis that Equinor is trading at bargain prices.

In spite of, or perhaps because of the low price relative to fair value, Equinor is also offering a very chunky dividend of 10.29% and a payout ratio of 60.1%, suggesting the sustainability of the yield is highly probable.

Clearly management is on board with the valuation argument because a management buyback is currently in play to the tune of $1.67 billion.

For a $90 billion market cap firm, that buyback is not necessarily going to move the needle tremendously but it is a vote of confidence nonetheless in the future prospects for the firm.

It’s worth highlighting that EQNR share price is up approximately 10% since that announcement, though it remains down for the year by 7.5%.

Will Oil Prices Hurt Equinor?

Equinor has undoubtedly suffered from weakening oil prices but 2024 may bring about a change to that perspective. Some analysts, like Kyle Bass, have argued that the US is at its weakest point in 50 years. His contention is that financially the debt is enormous, the country is fighting a proxy war in Ukraine, and the odds of China attacking Taiwan are high. If he’s right and the White House and military respond, expect oil prices to soar.

The counter argument is that oil prices recently fell to six-month lows, in part due to a weaker economic outlook for 2024. Still, Equinor should be in good shape because its break-even cost per barrel of oil last year was approximately $35 and with Brent crude futures currently around $74, oil prices are expected to remain well within a profitable range.

Another threat the company faces is regulatory risk stemming from government restrictions. In Q3, for instance, Equinor’s petition for higher prices from its offshore wind projects in the Northeastern US was rejected. Time will tell if other regions in which the company operates are similarly restrictive.

Is Equinor Stock a Buy?

Equinor has a number of very compelling points in its favor for new buyers. For one, management has shown tremendous conviction in their belief that the stock is undervalued and betting over $1 billion on a share repurchase scheme.

The dividend of over 10% is yet another key factor that should drive demand for the stock as investors find the income appealing, particularly given the likely sustainability of the dividend.

Add to those tailwinds the sky high ROIC of 36.1% and 20.2% return on equity and it’s clear management is doing a lot right.

While it’s true that Equinor share price is to a large extent susceptible to oil price swings, the net result over the past decade has been for revenues to rise from $101 billion to $149 billion and earnings per share now sits at a 10-year high of $9.03 per share thanks to $73.2 billion of EBIT.

Should any geopolitical conflict spark a confrontation or indeed if oil prices rise, period, expect Equinor share price to react favorable for shareholders now. 

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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.