Equinor ASA

NYSE:EQNR

Earnings Call Transcript 2022-Q4

[Sissel Rinde, executive]

Good morning, and welcome to this press conference where we will present Equinor's fourth quarter and full year results. It has been a while since we have had a press conference in London. So we are very pleased to meeting you here. My name is Sissel Rinde and I'm Head of Media Relations in Equinor. If an emergency situation should occur while we are here, the evacuation signal is a voice system announcement. Please note, we only evacuate the building should the voice announcement say to do so. Then please use the time posted fire exits within the venue, follow the times and messages from the guards. Exiting is at ground level, then your staff will show you the way to the assembly point. After the presentation, there will be an opportunity to ask questions in [ ternary ]. [Operator Instructions] Then there will be some time for separate interviews of the CEO and the CFO. And with that, I will welcome Equinor's CEO, Anders Opedal on the stage.

[Anders Opedal, executive]

Thank you very much, Sissel, and good morning. Good to see you all, and welcome to our press conference here in London. Later today, we will -- at our capital markets update, we will share the progress on our strategy and the ambitions as well as our financial results. But before we begin, let me just say that our thoughts go to everyone suffering after the terrible earthquake in Turkey and Syria. We will donate funds to Red Cross and UNICEF to support the relief effort. 2022 was truly an extraordinary year. The war in Europe still causing human suffering, and disrupted energy market contributed to inflation and a cost-of-living crisis.

Equinor responded quickly, and we are well positioned to be part of the solution, short term to deliver the energy needed, longer term to build up sustainable energy sources contributing to energy security and decarbonization. This leads me to the topic of our capital market update, how we will deliver strong returns through the transition? We have progressed on our strategy, producing oil and gas with low CO2 emission while stepping up investments in renewables and low-carbon solutions. Equinor is transforming as a broad energy company, progressing on the energy transition plan. We are well positioned to create value. In a $70 [ Brent ] scenario, we expect to deliver a very strong cash flow from operations. On average, around $20 billion after tax annually all the way to 2030. We estimate an annual return of capital employed above 15% towards 2030.

This strong outlook and solid financial position funds increased capital distribution and continued investments in profitable projects. For fourth quarter 2022, we stepped up our capital distribution to shareholders and proposed a 50% increase in the ordinary cash dividend to $0.30 per share. In combination with extraordinary dividend and share buyback, we expect a total distribution to shareholders of around $17 billion in 2023. I will revert to this, but let me first present our results. On safety, we have achieved improvements on key indicators over several years. Our serious incident frequency of 0.4% was stable from 2021, the best level so far. We continue to work with the clear goal, all our people returning safely home from work every day.

Last year, we enhanced security within cyber and for our assets, stricter security protocols, more training and closer collaboration with authorities. All of this to safeguard our people, operations and security of supply for our customers. Sustainability is all about making progress for society. We are committed to creating local value, equal opportunities and protecting the environment. In 2022, we responded to the energy security situation by boosting our gas production and shipping more crude to Europe. I'm proud of the hard work from colleagues to ensure safe and reliable supply of energy. This is a true team effort. And during the year, 2,600 new colleagues joined Equinor, replacing and renewing competence, demonstrating our attractiveness in a tight labor market.

Last year, we delivered strong operational performance. Seven new fields on stream add a capacity of more than 200,000 barrels per day, around half of this from Johan Sverdrup Phase 2. In addition, we have put our floating wind farm Hywind Tampen in production on NCS. Based on strong operational performance and high prices, we delivered record returns. Our net operating income came in at $79 billion and adjusted earnings at $75 billion. This clearly demonstrates our ability to capture value from high prices and volatile markets. Across the portfolio, we have progressed on projects to reduce our own emissions. Our CO2 intensity ended at [ 6.9%, ] well below half the industry average.

We are progressing on our project for decarbonization with CO2 transport and storage, including [indiscernible] a higher license on NCS awarded last year, we have our acreage to store around 30 million tonnes CO2 annually. In the fourth quarter, despite European gas prices falling, we delivered a strong net income of $7.9 billion and adjusted earnings after tax of $5.8 billion. No company, including Equinor, is shielded from the inflation and cost pressure in our industry. Our operating costs are impacted by inflation, energy costs as well as prices and taxes for CO2. In U.S., we reversed impairments of $350 million. And for Mariner in U.K., we reversed impairments of around $750 million. This is due to higher expected value creation as well as higher price assumptions.

Our strong earnings and outlook in U.S. has allowed us to book our deferred tax asset of $2.7 billion, originating from historical losses. This makes our reported tax rate for the quarter lower in relative terms. I must also highlight our MMP segment this quarter. Without a negative derivative timing effects, adjusted earnings for MMP would have been $1.8 billion. In MMP, Triton Power delivered strong results, more than twice the acquisition price. We deliver a net cash flow above $23 billion after tax, capital distribution and investments. Organic investments ended at $8.1 billion and distribution to shareholders at $8.7 billion. With strong earnings comes higher tax contribution to society. On the Norwegian Continental Shelf, where most of our earnings come from, we paid more than NOK 420 billion or more than $42 billion last year.

There is a delay in the Norwegian tax bill. And in total, for 2022, we will pay close to NOK 477 million or $47 billion, a record to be proud of in a very special year behind us. The energy transition must progress in a balanced way, ensuring energy security, affordability and decarbonization. Our strategy serves us well and is as relevant as ever on the way to Net Zero. We are in a unique position to create value, providing energy security and decarbonization. In 2023, we estimate a 3% production increase. By the end of the decade, we expect the production to be on par with today while delivering a 50% reduction in our emissions.

The estimated production will secure long-term supply of gas from NCS to Europe. We expect the average annual production to be above 40 BCMs throughout the decade. And our pipe gas to Europe have less than 1/5 of the CO2 intensity compared to LNG imports. In Renewables, we continue our profitable and disciplined growth. Our California lease serves as a demonstration of our ability to put value over volume. Later this year, we will start production from the first phase of Dogger Bank here in U.K. The first phase has the capacity of 1.2 gigawatt alone. And in total, the Dogger Bank phases can power 5 million U.K. homes. As renewable projects start production, power generation will grow rapidly, and we will prioritize the projects bringing the best returns.

We expect to grow our annual production from the 1.6-terawatt hours today to between 35 and 60 in 2030. To add some perspective, this is enough to power 9 million to 15 million U.K. homes or around 1/3 of the Norwegian hydropower production. Equinor has safely stored CO2 for almost 30 years in the [indiscernible] field. We introduced low-carbon solutions as a part of our corporate strategy in 2021. Since then, we have made strong progress. For our projects and plants in Europe and U.S., the recent policy development will strengthen the commercial potential. We see growing interest in CO2 storage and customer -- and hydrogen from industrial customers. Last summer, Northern Lights on NCS signed its first commercial agreement.

In U.K., our East Coast cluster was shortlisted in the government cluster process. And in January, we announced a cooperation with RWE in Germany for energy security and decarbonization. Together, we aim to help Germany transition from coal to gas to low-carbon hydrogen and finally, hydrogen from renewables. Our liquids, gas and power production is high, but far exceeded by the volumes we sell and trade. Last year, we sold more than 800 million barrels of liquids, 100 Bcm of gas and traded more than 175 terawatt hours of power. We optimize and create value from production, our infrastructure and the volumes we sell and trade. On top of this, we will provide decarbonization through CCS and hydrogen. Going forward, we are set to continue capturing high value from volatile and tight markets. On the back of this, we increased our guiding for marketing, midstream and processing by 60%.

Creating and capturing value across our business, we estimate our free cash flow over the 4 years to 2026 of around $25 billion. The energy transition will be demanding with difficult [indiscernible]. We believe in a balanced energy transition and Equinor [indiscernible], reduce emissions for ourselves and our customers, build of new energy sources and secure reliable energy. We will work hard to deliver on this and at the same time, create value for shareholders and society. We continue to cut our emissions from operations. Since 2015, we have cut almost 30% of our emissions on the way to net 50% reduction in 2030. The share of gross investments in renewables and low carbon is on track to a 30% share by 2025, progressing towards more than 50% in 2030. We are also progressing on our energy transition plan and remain committed to the ambition of Net Zero.

Our strong cash flow outlook, continued capital discipline and robust balance sheet is the basis for the increase in the capital distribution. To me, it is important that the step-up provides highly competitive distribution for 2023 and increased predictability and commitment in the long run. The Board proposes a 50% increase in the ordinary cash dividend from $0.20 to $0.30 per share for the fourth quarter. Our dividend policy remains firm. We expect to increase the annual ordinary cash dividend in line with long-term underlying earnings now from a higher base. In addition to the ordinary cash dividend, now above pre-COVID levels, share buybacks are an integrated part of our ordinary capital distribution. We continued the program we introduced back in June 2021 of $1.2 billion per year. The record earnings last year, our strong financial position also enables extraordinary distribution to shareholders in 2023. We proposed an extraordinary cash dividend of $0.60 per share for fourth quarter. This will bring the total quarterly cash dividend to $0.90 per share subject to AGM approval. The Board is clear in its intention to maintain this level for the first 3 quarters of 2023. In addition, we proposed an extraordinary buyback of shares of $4.8 billion, making it $6 billion for the year. In total, this leads to a capital distribution to shareholders of around $17 billion in 2023.

So let me sum up. We are uniquely positioned to create value by providing energy security and decarbonization. We reaffirm our commitment and step up capital distribution while investing in our profitable portfolio. We can deliver the energy needed while driving the transition to low-carbon future. Thank you all for the attention. And then I hand it over to you, Sissel [indiscernible]. And Sissel, I look forward to your questions.

[Sissel Rinde, executive]

Thank you, Anders. Okay. Then let's open up for you. [Operator Instructions] First from [indiscernible] and [indiscernible].

[Unknown Analyst]

2 questions. One on your prediction about European gas deliveries and the second one on CapEx. Before you've said that you expect to deliver at least 40 Bcm annually to Europe until 2026. Now it seems you're saying to the end of the decade. Are you -- have you updated your assumptions on your production capabilities from the Norwegian Continental Shelf? And the second question is about your CapEx. Your increase from $12 billion to $13 billion in the coming years. Is this inflation driven? Or have you changed your mix in your project's portfolio?

[Anders Opedal, executive]

First of all, we have always developing resources on Norwegian continental shelf. We have an exploration program. We will explore between 20 to 30 exploration wells every year. In 2023, we will have around 25 exploration wells on the Norwegian continental shelf. With this maturing resources, developing [indiscernible] projects. Exploring, we see that we can maintain the production level at a high level up to 2030 and even beyond. Then regarding CapEx, we have included the inflation into our CapEx numbers that we have seen over the last year. And then as we have guided on before, we will gradually ramp up our investments in renewable as we mature the projects, and we sanction them. So you will see that it's driven by our increased renewable portfolio, but also that we maintain a very high and stable CapEx for our oil and gas portfolio.

[Unknown Analyst]

Rachel from [indiscernible]. First question, do you envisage increasing gas deliveries to the U.K. in coming years? And is there -- by roughly how much? And secondly, do you plan on going ahead with the Rosebank project in the North Sea?

[Anders Opedal, executive]

Well, as you will see from our production guiding, we're increasing it for the 2023. This is due to the ramp-up of the Njord and the Johan [indiscernible], which is liquid. As I mentioned, 40 Bcm all the way to 2030. This means that stable flow of gas from Equinor and the Norwegian continental shelf. And that means energy security to U.K. No plans to significantly ramp it up, but to have a stable, reliable gas coming to U.K. And then we are progressing on the maturation of the Rosebank projects and we will come back to any sanction at a later stage with Rosebank.

[Deb Kelly, analyst]

Deb Kelly from Energy Intelligence. Where do you see the bottlenecks in terms of reaching your 12-to-16-gigawatt renewable target? And then secondly, you've spoken previously about making changes to the way the renewables businesses run for it to be competitive and have sufficient freedom to develop. Can you talk about what those changes are, and how it will improve that business?

[Anders Opedal, executive]

Yes. As you said, our target 12 to 16 gigawatts is the target with maintain. But today, we will more present the power production from this potential of 12 to 16. And we will continue developing the renewable portfolio. We have a broader set of opportunity set now after progressing this. We have [ excess ] 14 gigawatts into our portfolio. This means that we can select the best projects and how we progress them further. And also, just for your second question, we have given the renewable unit more accountability, running it a little bit more like a company in terms of financial results. And that's why we now measure them on the power production. So -- and they will then also take more responsibility for project's execution and procurement and really drive a profitable growth in renewables. So that is what we want to get out of that.

[Unknown Analyst]

Yes. You are talking about -- you are adjusting the medium-term price outlook, and you're hiking the expectations for oil price and especially gas price. Can you say a little bit about the short-term development of the oil prices and why you are increasing this now?

[Anders Opedal, executive]

Well, the oil market going forward is quite volatile. We see that it's very little spare capacity. There are several unknown factors going forward. The economic return of China after the COVID, how Russia will develop with the sanction. So we see a tight market and volatile market going forward, and that is the basis for our price assumptions.

[Sissel Rinde, executive]

No more questions here. Okay. I see one over there.

[Stanley Reed, analyst]

Stanley Reed from New York Times. Just would be interested in what your outlook is for gas in Europe over the next year or 2, kind of what your assumptions are?

[Anders Opedal, executive]

Well, at the moment, we see some unprecedented warm winter which keeps the storage level quite high. And Europe will make it through this winter. Most likely also be able to refill the storage from next winter, but that will require a further reduction in demand, and it will require a massive import of LNG. So that means that really the LNG import will be one of the critical factors. And then the unknowns there, of course, then further the weather, both in Europe and Asia. And I think also any supply disruption, destruction will have impact of the market. So I would say it's a little bit of a nervous market going forward.

[Unknown Analyst]

[indiscernible]. Just a couple of questions. The first one is there anything you can tell us about the development of the Brazil, BM-C-33 and the [indiscernible] project this year? And the second one is that what are your expectations for your returns on renewables this year? Are you satisfied with the rate where you have, and do you think you can enhance that further?

[Anders Opedal, executive]

As Rosebank, BM-C-33 is also progressing toward FID, but it's too early to say when and so. But -- and also on the returns, we maintain the 4% to 8% returns on project level [ wheel ]. But with a broader set of portfolio, Paul and his team can really drive and prioritize the project with the best return all the time.

[Sissel Rinde, executive]

Okay. One more question to you, Rachel.

[Unknown Analyst]

I just want to pick up on Stanley's question. And you mentioned that in order to refill storage to the next too, you'll need to be a further reduction in demand. Could you just elaborate on what sort of further demand reduction you think you will need?

[Anders Opedal, executive]

No, that's more general, and obviously, we just see that the gas demand needs to be lower to be able to refill at a certain level as Russian gas will be less available in 2023 compared to the beginning of 2022. So that goes across for consumers and industries.

[Sissel Rinde, executive]

A question to Michael [indiscernible].

[Unknown Analyst]

Just reverting to CapEx. This is sort of a follow-up. I think I heard you correctly when you said that you had baked in your new assumptions on inflation into those new CapEx guidance figures. Can you get into whether there is any of that that's in the increase compared to the guiding that you provided last year? Is there any of that that's linked to an increase in activity compared to what you foresaw a year ago?

[Anders Opedal, executive]

Well, I think you should see the CapEx guiding this year, $10 million to $11 million is in line with the guided range we had last year. So inflation is baked in there, and we have a long-term project plans. You'll also see we had guided up for later years last year, and we do the same this year. This is about activity increase as we mature the projects.

[Sissel Rinde, executive]

Okay. Then we have a question from [indiscernible].

[Unknown Analyst]

I was just wondering, can you -- sorry, elaborate a bit more on -- you made a pretty significant -- well, you made a [ loss ] on renewables. Can you elaborate a bit on the underlying factors there?

[Anders Opedal, executive]

On the underlying factors for?

[Unknown Analyst]

The reasons for the loss-making in the renewables for last year.

[Anders Opedal, executive]

Okay. So for the producing assets, we are making money, but we are in a [ investing ] phase, meaning that after the income, we have expenses that goes on the P&L, and that's why we make a loss on the renewables. This is planned and that will happen as long as we are in this investing phase. But this year, our income will increase as Dogger Bank A is coming on the first power. And gradually, the Dogger Bank A, B and C will come each year '23, '24 and '25.

[Sissel Rinde, executive]

We close this session now. And then it will be possible to one-to-one interviews with Anders Opedal and also the CFO, Torgrim Reitan.