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EQNR.OL - Q3 2021 Equinor ASA Earnings Call

EVENT DATE/TIME: OCTOBER 27, 2021 / 9:30AM GMT

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OCTOBER 27, 2021 / 9:30AM, EQNR.OL - Q3 2021 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

Ørjan Kvelvane Equinor ASA - SVP of Accounting

Peter Hutton Equinor ASA - SVP of IR

Svein Skeie Equinor ASA - SVP of Performance Management & Risk

Ulrica Fearn 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

Anders Torgrim Holte Kepler Cheuvreux, Research Division - Equity Research Analyst

Biraj Borkhataria RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst Jason S. Kenney Banco Santander, S.A., Research Division - Head of European Oil and Gas Equity Research

John A. Schj. Olaisen ABG Sundal Collier Holding ASA, Research Division - Joint Global Head of Research

Jonathon Rigby UBS Investment Bank, Research Division - MD, Head of Oil Research and Lead Analyst

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

Mehdi Ennebati BofA Securities, Research Division - Research Analyst

Michele Della Vigna Goldman Sachs Group, Inc., Research Division - Co-Head of European Equity Research & MD Oswald C. Clint Sanford C. Bernstein & Co., LLC., Research Division - Senior 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

Andre Klotz Jefferies - Analyst

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Equinor 3Q results call. (Operator Instructions) I would now like to turn the conference over to Mr. Peter Hutton, Senior Vice President. Please go ahead.

Peter Hutton - Equinor ASA - SVP of IR

Thank you. And indeed, very much welcome to the Equinor 3Q results call. Thank you for the participation. We're joined today by Ulrica Fearn, CFO, who will run through a presentation of our results, and then we'll open up for questions, which we hope to complete within the hour. Also on the call, we have Svein Skeie, Head of Performance and Risk; Ørjan Kvelvane, who is Head of Accounting; and Mads Holm, Head of Tax and Treasury. With that, I pass immediately over to Ulrica. Thank you.

Ulrica Fearn - Equinor ASA - Executive VP & CFO

Thank you, Peter, and thank you all for joining the call today. Today, we present our strongest financial results since 2012. Clearly, these results benefit from higher prices, particularly European gas prices but they also reflect our ability to capture those prices through our solid operational

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OCTOBER 27, 2021 / 9:30AM, EQNR.OL - Q3 2021 Equinor ASA Earnings Call

performance with high production efficiency, our flexible gas capabilities, which gives us potential to optimize volumes and our continued focus on costs.

We delivered very strong cash flow from operations of over $10 billion dollars in the quarter before tax and over $9 billion after tax, reflecting the normal phasing with only 1 tax payment on the NCS in the third quarter. Along with strict capital discipline, this further strengthens our balance sheet, makes us more robust for any future volatility and allows us to continue to invest in the energy transition. It also allows us to increase our capital distribution, and I'll get back to that shortly.

We are seeing significant moves in the energy markets and particularly in the gas market in Europe. Record prices in the second quarter were beaten in the third quarter and prices have continued to rise in October. This generates higher revenues for Equinor, but also serves as a reminder of the level of volatility in our markets. We are experiencing a tight gas market. At present, European inventories are low, and we expect the market to remain tight and subject to volatility going into the winter.

The tightness of the energy market affects European industry and households, and Equinor remains committed to be a stable and reliable supplier of gas to Europe. Therefore, we are now flexing to produce as much as we can and turning every valve to produce and export more gas to meet European demand. Earlier this autumn, we received permission to produce 2 billion cubic meters of additional natural gas from Troll and Oseberg. And I can also mention that Gina Krog, we have in October decided to redirect gas from normal injection to be able to increase exports over the next 6 months by about 30,000 barrels per day oil equivalent.

This is an extraordinary measure resulting from the collaboration of partners and authorities. We started production from Troll Phase 3. And as I witnessed myself when visiting the platform this month, the production of Troll A has fully ramped up again after the startup. It's worth reminding you of its profitability, a breakeven below $10. While this is only limited impact on near-term production, it improves resilience and its real value is over the longer term, with recoverable reserves of almost 350 billion cubic meters of gas extending to deliveries to Europe beyond 2050.

We continue to make progress on our ambition to reach net zero by 2050 as outlined in our Capital Markets Day. We passed an important milestone for low carbon value chain when the East Coast cluster in the Humber region was selected as one of the two first carbon capture usage and storage project in the U.K. This is the area where Equinor has its largest portfolio of projects for blue hydrogen and low-carbon gas power to be realized with CCS. We further introduced the concept of our Norway energy hub, an industrial plan for the energy transition in Norway. This sets out how by working across industries and supply chains, we can industrialize offshore wins, make carbon capture and storage profitable and scale hydrogen production. It further shows how we can mature the solutions for the future using a base of existing capabilities and technologies.

The Board has decided on cash dividend of $0.18 per share. At our Capital Markets Day in June, we introduced a share buyback program, which provides more flexibility for capital distribution to shareholders. Our first tranche will sit at $300 million and completed in the quarter. Based on the strong commodity prices, strong cash flow generation, a strong net debt ratio, the Board has decided to increase the size of the second tranche of the share buyback program from the indicated level of $300 million to $1 billion, including the government shares.

At the CMU, we highlighted the cash returns of $0.18 per share in cash dividend and $0.09 per share from the share buyback. This took us to $0.27 per share level with April 2020. With this increase in the share buyback, the return to shareholders increases in the quarter to $0.30 per share from the buyback, which in addition to the dividend of $0.18, takes us up to $0.48 per share for the third quarter. This is over 75% higher than the pre-COVID levels of $0.27 and shows the advantage of the flexibility in the capital distribution process and ability to return cash to shareholders.

For the last 12 months, we reported serious incident frequency of 0.4 and a total recordable injury frequency of 2.5 per million working hours. We are not satisfied with this, and work to systematically find -- we work systematically to find root causes while working with our suppliers and partners to strengthen our joint safety culture.

Turning to our financial results. Adjusted earnings totaled $9.8 billion, up from $780 million same quarter last year. The IFRS net operating income was $9.6 billion, and the IFRS net income, $1.4 billion. We see strong results across all our business areas in the quarter.

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OCTOBER 27, 2021 / 9:30AM, EQNR.OL - Q3 2021 Equinor ASA Earnings Call

From our Norwegian upstream business, the higher prices, solid production efficiency and continued cost focus resulted in the highest contribution to net operating income since 2012. Our midstream and marketing segment, MMP, post results far above our normal guidance. This is mainly due to the mark-to-market developments on our derivatives. Equinor's gas sales are mostly spot based, but relatively small proportion of our volumes are based on longer dated indices. Equinor uses derivatives to change its price exposure towards spot and front month pricing to obtain and match that over the rest of the portfolio. We don't report any realized gains or losses on the underlying gas volumes until the period when they are physically delivered. However, any mark-to-market gains or losses on derivatives are reported every quarter. This is part of normal accounting.

The recent scale of movement in the gas markets make these unrealized gains of derivatives associated with future gas deliveries significant. At current market prices, you should expect these gains to be approximately matched to the loss on physical deliveries in MMP over the next 2 quarters. Excluding the effect of these gas derivatives, the results for MMP in the quarter would have been a little below the normal range of $250 million to $500 million, consistent with what we said in the second quarter call. Overall, this has allowed us to capture current European gas prices.

In the quarter, we had net reversals of impairments of around $500 million. The 2 largest factors being the reversal of impairment of almost $980 million on one of our assets on the Norwegian Continental Shelf, mainly due to increased short-term gas prices. This is partially offset by an impairment of a refinery of $480 million due to the expected increased CO2 costs going forward. The group tax rate in the quarter will be 71.6%. This was up from 66% last quarter and due to strong earnings on the Norwegian Continental Shelf where the uplift deduction has less effect with higher prices.

And now to more detailed comment on the earnings by segment. E&P Norway delivered another excellent quarter. We achieved high production efficiency and have optimized gas production supporting stable supply and capturing the higher prices. In the quarter, you will see an increase in reported costs in U.S. dollars which mainly reflects an increased noncash removal costs from Gassled of around $200 million as well as currency effects due to strengthened Norwegian kroner compared to the same period last year.

The underlying unit costs are stable. E&P International delivered solid cash flow and strong earnings of $556 million before tax. We have continued to optimize the optimization of the portfolio and announced -- as announced in the Capital Markets Day, and it is reflected by the reduction in reported exploration costs in the quarter as well as continued cost focus. E&P U.S. delivered production on par with the third quarter last year and adjusting for divestment in Bakken, this despite the effects of Hurricane Ida, which for Equinor had the highest impact of any hurricane in Gulf of Mexico and impacted production by over 20,000 barrels per day. By now, volumes have effectively come back to normal levels.

We also reaped the benefit of long-term improvement efforts and cost focus. These, in combination with higher prices, lower CapEx, continue to generate strong cash flow from our U.S. business of $477 million and solid earnings of $285 million after tax.

Our Midstream & Marketing segment delivered adjusted earnings of $2.2 billion before tax and $428 million after tax. As already mentioned, this record high result is largely due to the effect of mark-to-market gains on derivatives. But at current prices, this will be followed by a loss on physical deliveries in MMP in later quarters. Our strong sales of gas volumes and trading in North America also contributed to the results and account for 25% of MMP's earnings after tax.

Hammerfest LNG remains shut down with expected startup end of March. In the Renewables business, lower wind than seasonal average was partly offset by higher electricity prices and earnings from assets in production totaled $15 million. High activity levels on development contributes to a negative result of $28 million. As announced, we changed our policy of including gains and losses from sales in the adjusted earnings from the third quarter. This policy is now consistent with our other segments, where gains and losses from sales are included in the IFRS results but not in adjusted earnings.

We delivered solid operational performance with total production of 1,996,000 barrels of oil equivalent per day. Adjusting for the divestment of Bakken, production increased by around 3.5% compared to the third quarter last year. We optimize our gas production. And in addition to Troll Phase 3, it's worth mentioning that about half of the production from Martin Linge is gas transported through the Frigg pipeline to the U.K. Increased volumes from Johan Sverdrup adds to the production in the quarter.

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OCTOBER 27, 2021 / 9:30AM, EQNR.OL - Q3 2021 Equinor ASA Earnings Call

In the U.S., the production in the Gulf of Mexico is returning to normal after the impact of Hurricane Ida. We delivered a production of 304 gigawatt hours, down from about 319 in the same quarter last year. Our wind farm had good availability, but less wind than seasonal average impacted production. We are on track with maturing our renewables portfolio and developing projects.

For Empire Wind, we recently selected the preferred supplier of the 15 megawatt with wind turbines. These are turbines of size that 1 single rotation can meet the energy demand of households in New York for 1.5 days and further improve efficiency in cost for the project. In the U.K., we have started up the joint operation center for Sheringham Shoal and Dungeon, an important step in the effort to capture synergies and increase in the efficiency in the industry.

The cash flow from operations is very strong, with $10.8 billion in the quarter before tax and a total of $24 billion so far this year. Higher prices, solid operational performance and strict capital discipline contributed positively to the cash flow. In the quarter, we had 1 tax payment of -- for the Norwegian Continental Shelf of NOK 11.8 billion. With higher prices and solid results, we also updated the estimated tax payments for 2021.

In the fourth quarter, we will pay a total of NOK 55.5 billion. In total, we expect to pay more than NOK 130 billion in taxes related to 2021 on the Norwegian Continental Shelf. The net debt ratio is 13.2%, and it's adjusted for half our tax payments paid on the 1st of October, which increases the ratio by around 5 percentage points.

Let me briefly mention our guiding before we open for questions. We expect the production growth of around 2% for the current year, and we are approaching year-end, and we see that our CapEx will come in somewhat lower. We therefore adjust our expectations for the year to around $8 billion in 2021. The rest of the guiding remains firm, and we will revert to this at our next capital market update that will be on the 9th of February 2022. And with that, I hand back to you, Peter, and look forward to questions.

Peter Hutton - Equinor ASA - SVP of IR

Thanks, Ulrica, and I immediately pass over to the operator to open up for the polling.

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

Operator

(Operator Instructions) The first question is from the line of Oswald Clint from Bernstein.

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

Two, please. The first one, just on natural gas and your business. The -- your invoice gas price in Europe was lower than the internal gas price, which is unusual. I know there's obviously a lot of stuff going on. So it's a little bit tricky to understand that perhaps you could explain that dynamic. Perhaps it's just a derivative. So what was happening to that in the quarter? And when might we expect that to revert to the mean and just get that margin that we're much more accustomed to coming through, please?

And then second was, I think there's obviously still some COVID impact here, scheduling delays, some cost pressures. I think you're still pointing to as still happening potentially project execution, cost risk still out there, but obviously unpredictable. I'm always cognizant of Equinor just announcing project delays and cost hikes with press releases. But Ulrica, I just want to get a sense, is there anything you're looking at or worrying about here as you think about that particular comment, please?

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