Equinor ASA (EQNR) Earnings Call Transcript

Hello, and welcome to Equinor Analyst Call, I would like to turn the call over to Bard Pedersen, Head of Investor Relations. Bard, you may begin.

Thank you, operator, and good morning all. Thank you for joining the analyst call for Equinor's second quarter results. Our CFO, Torgrim Reitan, will as usual, present the results before we open for Q&A. We plan to complete the session within one hour in total. And with that, I hand it to Torgrim to take us through the results.

Thank you, Bard, and good morning, and thank you for joining us, and I hope you are all enjoying your summer. Today, it is high weeks since our Capital Markets Day, where we shared with you our updated plans to deliver more energy, growing cash flow and superior returns. We showed you an improved portfolio delivering production growth of 150,000 barrels per day to 2030, a growth in cash flow from operations of 30% and an industry-leading 15% return on capital employed. With this, we expect to deliver over $40 billion in free cash flow towards 2030. And not to forget, we presented a breakeven after dividend of $50 per barrel. This is a reduction of this breakeven price of $10 per barrel. In the second quarter, we took several concrete steps to deliver on this. On the Norwegian continent ourself, we awarded the contracts for the first wave of tieback projects. This is an important first within our new NCS 2035 operating model aiming to double the speed of developments and reduce costs by half. The contracts awarded for the first wave, support these improvements. We continued to use business development as a tool to harmonize ownership across licenses. We have done this through a series of swaps with DNO, Aker BP and [indiscernible] Energy, supporting progress on the [indiscernible] Project. Internationally, we took the final investment decision for the greater Parc project in Angola, where we expect to generate more than $50 per barrel in cash flow from operations. Greater Parch is an important step in building longevity within the international E&P business and growing cash flow from operations by 80% towards 2030. We also delivered strong results in the quarter. Production grew by 3% with well-executed turnarounds and new fields like Irene and Zimbra coming on stream during the quarter. With this, we capture value from higher prices, and our trading business captures value uplift from increased volatility, delivering strong contribution to our results this quarter. We report adjusted operating income of $11.5 billion before tax and an IFRS net income of [ $4.8 billion ]. Year-to-date, our cash flow from operations after tax has been strong at $13.7 billion. This quarter, our adjusted earnings per share were $1.33. While energy markets remain impacted by geopolitical unrest, we continue to focus on what we control our operations, how we remain robust through price cycles and our commitment to cost and capital discipline. Then to capital distribution. At our Capital Markets Day, we announced a doubling of the share buyback program for 2026 from $1.5 billion to $3 billion. We follow up this now. And for the quarter, the Board approved an ordinary cash dividend of $0.39 per share and a third tranche of share buyback of to $1.125 billion, including the state's share. So let's dive into our results. First, let me start with safety, our top priority. Our serious incident frequency and personal injury rate remained relatively stable in the second quarter. We have seen a slight increase in both metrics this year when compared to 2025. We are working very hard to learn incidents to improve safety and performance further. In the second quarter, we produced 2,165,000 barrels per day, up 3% from the same quarter last year. On the NCS, our production is up 4% mainly driven by new fields like Johan Castberg, Hulton East and Verdande. Now we are adding also Arena Simra, which came on stream this quarter. Let me also highlight that we saw another quarter of strong performance from Johan Sverdrup. We have previously indicated a decline of 10% to 20% this year from that asset. Based on the strong performance so far, we now expect it to be at the low end of this range. NCS production was impacted by planned turnarounds and maintenance and also Johan Castberg come off-line for a period towards the end of the quarter and into July. Johan Castberg is back at [indiscernible] after production resumed last week, implying that the impact will be larger in the third quarter than in the second quarter. Internationally, the increase was driven by Adura in the U.K. and Bacalhau in Brazil. The growth more than offsets the decrease from our reduced ownership in Peregrino and the divestment of the onshore Argentina assets. During the first half of 2026, we have delivered, in total, a very strong production growth of 6%. Therefore, our guidance of a 3% growth for the full year is no more robust than when we started the year. Even taking into account the issues at Johan Castberg and the planned turnarounds also in the third quarter. Within Power, we produced 1.2 terawatt hours this quarter. The growth is from Dogger Bank in the U.K. and new onshore assets. Now to our financial results. Liquids and European gas prices were higher than the same quarter last year, while U.S. gas prices were lower. This has impacted our results across the segments. Adjusted operating income in E&P Norway totaled $9.2 billion before tax and $2.1 billion after tax. In our international E&P business, prices increased around 50%, but operating income almost doubled based on production growth of 4% and increased quality in the portfolio. Our E&P U.S. results were driven by high offshore production with higher [indiscernible] partly offset by lower gas prices in the U.S. MMP delivered $777 million pretax, well above the guiding of $400 million per quarter. This was driven by crude trading and strong performance at our refinery Monster, capturing value from higher margins. Our Power results reflect a strong contribution from Power Trading for the second quarter in a row. In total, we have nearly doubled our adjusted operating income after tax compared to last year, demonstrating the improvements in the portfolio and our ability to capture value in higher price environments. This quarter, cash flow from operations was $14.8 billion before tax. We paid 47.1 billion in taxes, including 3 NCS installments, summing up to around $6.4 billion. Next quarter, there will be 2 payments of $23.3 billion each. Although in the second quarter, we received a quarterly cash distribution from Adura of $150 million. The sale of the Argentina onshore assets resulted in a cash proceeds of $558 million in the quarter, in addition to $88 million in proceeds received in the first quarter. We also recorded a gain of $467 million during the second quarter. Our financial position in Scatec was partially divested or $171 million during the quarter. Here, we have an accumulated recorded gain of $61 million. Organic CapEx was $3.4 billion, and our net cash flow before distribution was positive $5.5 billion. This quarter, we distributed $1.1 billion to our shareholders. We strengthened our balance sheet and have a solid financial position with around $24 billion in cash and cash equivalents. Working capital, which is not included in our cash flow from operations decreased by $1.8 billion to $3.6 billion. This is a lower level than what we usually have. Our net debt ratio decreased to 10.4% this quarter despite 3 tax installments paid and the state's share of the buyback from last year booked as a finance debt. This state share of share buyback was paid in early July, and the cash flow impact will be as such in the third quarter. At current forward prices, we expect the net debt ratio to be somewhat below 10% at the end of the year. And now to our guidance, where there are no changes. Our progress is in line with our communicated outlook both in terms of production, CapEx and capital distribution. And finally, two concludes. I will refer you back to a slide from our Capital Markets Day, 5 weeks ago. The second quarter results demonstrate execution in line with the plans we presented to deliver. More Energy, 150,000 barrels per day production growth to 2030. Our growing cash flow, a 30% growth in cash flow from operations and superior returns. We will continue to lead the industry on the return on capital employed and we aim for 15% through this decade. So now thank you very much, and I look forward to your questions. So back to you Bard.

Thank you, Torgrim, and we are ready to start the Q&A. [Operator Instructions] First, we have Teodor Sveen-Nilsen from Sparebank Markets.

Two questions from me. First, on the cost production as far as understand season to going into Q3. I just wonder specifically you can indicate what you expect as net production tracking from cost in Q3? And the second question, that is on downstream NNP, we definitely have served the strong refinery margins going into the third quarter. Could you comment on the profitability of [indiscernible] this far in third quarter? And what you expected during the second half of this year?

Okay. Thanks, Teodor. So as far as I got the first question was about Johan Castberg, right? So we have had some issues related to the related to the turbines, [indiscernible] that took 3 weeks to -- or 18 days to get an order. We had it back in production from the 13th of July, meaning that the impact of sort of that stock is around 14,000 barrels per day for next quarter. So that is up and running again. It is a field that is producing very well. And clearly, but it is still sort of in a run-in period. So there might always be some operational issues when you have a new field in getting there. But -- so that's the situation on Castberg. On the...

The 14,000 -- sorry, the 14,000 barrels, is it Equinor or [indiscernible]

Yes, that is Equinor impact. So then on the MMP results. So a strong result where Mongstad is contributing well with very high regularity. This is one part of the other group in the M&P reporting. So the it clearly creates significant value at the current refinery margins. To say a little bit about the refinery situation and the margin in Europe. Clearly, the oil market is tight, but the product market is even tighter. And if you look at the FCC margin for the second quarter, it was actually at some $25 per barrel, which is very significant. Don't give a specific margin for Mongstad. But clearly, it is significantly above what it costs to run at a breakeven. So, so far into this quarter, it continues to deliver strong results. So I mean, I encourage you to follow the general refinery margins going forward, and that will directly impact the Mongstad delivery.

Thank you, Teodor. Next one on my list is Biraj Borkhataria from RBC.

Just one question for me. Your partner, [indiscernible] gave up their state and you were targeting FID in 2027. So, are you comfortable to push that project forward at 100%? Or would you look to farm it down before progressing it? And maybe you could just talk a little bit about the sort of Canadian support for that project because it looks like there's quite a lot of movement and sort of sentiment change on the politics side in Canada recently.

Thank you very much, Biraj. Yes. So BP is sort of handing over the ownership in that asset to ourselves. There will be ultimately a minimum payment for us for this share. subject to a final investment decision, but a minimum one compared to the size of the opportunity here. So the time line -- there's no change to that. We aim to sanction it in 2027. And then we are working on bringing in another partner with us in this project. It is an attractive one, fully supported by the Canadian government. And as you would understand, in the current environment, energy security for all cultures are very high on the agenda and the same goes for Canada. So, this is an attractive investment opportunities that we look forward to realizing together with the Canadian government and potentially additional partners.

Thank you, Biraj. The next one is Santander, Alejandro Vigil.

I missed the beginning because I had some projects. So I don't know if someone asked about the European natural gas market, your expectation for the second half of the year in general, how you see the balance of demand supply in the market? And the second question is related to that. We are seeing a very strong energy commodity environment, but it's strong cash flow, your leverage now probably would be below 10%, according to our comment. Is there any room for additional buybacks this year above the $3 billion that you are guiding now?

Okay. Thank you very much, Alejandro, to be very important and large questions. So let me take the first one first on the European gas situation. So it is a vulnerable situation and we might enter the autumn and winter with large uncertainties. So clearly, the fact that the Hormuz Strait is where it is, sort of shuts in around 20% of sort of the global LNG and restricts the global flows of LNG. And that directly impacts Europe because currently, around 30% of the supplier will have to come from LNG and Europe will compete, particularly with Asia for that. And then when we combine that with a storage situation in Europe, where the storage filling is at 53%, which is more than 15 percentage points below below a normal situation or the average. It leads ourself that sort of -- it is a fairly tight situation. So we do assume or expect -- I mean, say that the situation around Hormuz is normalizing, and we are back to sort of regular flows of LNG. Still, we do not believe that Europe will get to 80% storage filling before the winter and we'll be below that. So that is the situation. Also worth mentioning is that Russian gas will leave Europe, I mean, this year, LNG is going to be stopped. Next year, the remaining [indiscernible] gas. So there will be even more LNG that needs to come to Europe. So first of all, we do hope the situation settles and that we can get back to normal but we just need to be prepared for volatility and uncertainty in the European gas market. You would know that sort of we are very well placed to provide reliable energy into a situation like that, which we take very, very seriously. We have a cost of gas of $2 per MBtu, currently selling into a close to a $20 market. Just illustrating how important the Norwegian gas is for Europe. We are the largest energy provider to Europe, and we'll continue to take that very, very seriously. Then your second question, strong cash flow, leverage and the potential for additional share buyback. So we aim to run with a very solid balance sheet. We have currently a net debt ratio of 10.4% based on the forward curve, as they looked a couple of days ago, we expect it to be somewhat lower than 10% by year-end and with a strong cash flow naturally. And we intend to to run with a very solid balance sheet and particularly in a high price environment to build balance sheet to be able to manage low price environments well as such. Then the question is related where the sort of there is the potential for more share buyback this year? The answer to that is no. We entered -- when we entered this year, we expected, of course, a much lower oil and gas prices than what we have seen. The way we have distributed or use that additional cash is, first and foremost, we have increased our investment into oil and gas with $1 billion into more in Norway, more internationally, actually adding to the production outlook in 2030. Secondly, we are strengthening the balance sheet. As we entered 2026, the plan was to lean on the balance sheet. We will no longer need to do that. We're actually strengthening the balance sheet. And the third priority is actually to double the share buyback for the year. So we think this is the best way to create shareholder value and allocate capital in this environment. From next year, there is a new framework in place, and we look forward to discuss that with you at our fourth quarter in February next year.

Thank you, Alejandro. Next question is Henri Patricot from UBS.

Two questions for me, please. Just the first one to come back to the a question on European gas and maybe more specifically for Equinor given the meta prices that we're seeing at the moment. I was wondering if there's any flexibility on your side to increase natural gas production in the second half of the year and exports to the European market? And secondly, thank you for the update on your Sverdrup production for the year. Good to see the good performance continues in the second quarter. I was hoping you could elaborate on what is driving the outperformance. And the new guidance seems to imply that it should be still quite a large drop in the second half of the year versus the first half. So could we still see even further outperformance in the second half of the year from johan Sverdrup?

Thank you very much, Henri. So when it comes to our production of gas to Europe. So we are already producing at maximum. So in the short term, no additional sort of overall volumes that can be made available. When that is said, we have flexibility in our production system and we have flexibility in our transportation system. So we will be able to get the natural gas to where it is needed the most and where the price is highest. So typically, what we have seen over the last year is that German prices have been higher than British prices, so more gas has actually gone to Germany in those periods. So we will continue to to optimize around the volumes that we have to provide Europe with gas where it is needed the most. Second point on this one is that, you are all well aware of that. We keep all our exposure to natural gas prices, floating. And we also keep it very exposed to the prompt. We have a 70% exposure to day-ahead prices and 30% in month ahead. So meaning volatility in prices will happen, we will be able to steer or gas to where that volatility is and capture the values from that as such. So, we will expect and we do expect more volatility during the next year within that market. Then on Johan Sverdrup. So clearly, we are using a lot of effort and all our competence to make the most out of Johan Sverdrup, and it continues to deliver better than the plan. At the point of sanctioning, we expected a recovery rate of 65% -- no, it's actually 75% that we look at. And we increased the plateau level, and we have been able to reduce decline more than the we had expected. If I should put to two sort of activities or technologies that are really making a big difference here. The first one is our ability to manage water because as sort of a field matures, you start to produce more and more water and then you need efficiently to manage that. That has gone very well. So as we manage water very efficiently we make room for more production. So that is a very important activity. The second one is sort of well placement. So we are now -- have now started to retrofit wells with multilaterals wells that already have been produced and skilled and then splitting into several wells from one wellbore. That has also continues to deliver very well, and we will continue with more of those during the year. So first half of the year has gone very well. We will continue to do our very best with Johan Sverdrup, and we'll see how that goes in the second quarter.

Thank you, Henri, for those questions. Michele Della Vigna from Goldman Sachs is up next.

And good to see the contribution of the Adura joint venture this quarter. I was wondering if you could elaborate a bit there. The company certainly has a lot of space to gear up and finance itself. What should we expect in terms of dividend from it in the next 12 months? And then secondly, you are ramping up a more frontier high-impact exploration. I was just wondering if you could lay out by the end of the year, what should be the high impact where we should be looking forward to?

Okay. Thanks, Michele. So first, on Adura. So we are very satisfied with having a setup that company together with Shell. Clearly, transforming our cash flow out of the U.K. from actually a negative cash flow due to investments to a positive contribution. So we have received $150 million in capital distribution in the first quarter and we have also received that now in the second quarter. Over the first -- over '26 and '27, we expect more than $1 billion in capital distribution altogether from Adura and then you asked a question about there is a potential to gear the company. Adura has raised around [ GBP 3 billion ] in debt. So it is already a fairly level to an appropriate level as such, giving them even more capacity to make business. Then on the exploration activities. So clearly, exploration activity is very important to us. We have drilling 120 wells per year. Many of these wells are sort of well close to infrastructure on the Norwegian continental shelf, but actually 20% of the wells in Norway are towards stand-alone opportunities. So there is a continued flow of sort of opportunities with higher impact and a higher sort of upside, of course, higher risk as well. Internationally, the program this year is mainly within ILX opportunities in Angola. Similar type of opportunities that we see in Norway. And then we have lined up several high-impact opportunities internationally. And if I should mention a few, it is actually Brazil. where we intend to drill a few high-impact opportunities through '27 and '28. Among others, the neighboring block to Boomerang in the southern part. So excited to we see where this brings us.

Thank you, Michele. Next one is Martin Rats from Morgan Stanley.

So two questions for me, if I may. I briefly wanted to ask you about the production guidance because I don't think I've sort of fully understood what you said. You said that with the results achieved in the first half, the full year production guidance is now better underpinned? I just want to make sure I've got that correct. But also given the result of the first half, doesn't the full year production guidance now imply sort of a deceleration or a sequential decline into the second half, suggesting perhaps that there may be sort of maybe some upside. I was hoping you could clarify that. And the other point I wanted to pick you up on is the gas price realizations in the United States. They've fallen more at least than we modeled. And I was hoping you could say a few things about it. It seems to be a lot of basis risk and a lot of very local circumstances going on. Last quarter, you got that position very strategic and look, it's only one quarter, so that's probably the case. But I was wondering if you could say a few things about whether that position is still sort of developing as you initially expected?

Okay. Thank you, Martin. So first on production guidance. So very strong operations in the first half of the year and better than we planned for when we started the year. So clearly coming out of good regularity across our operations, super delivery from operational organizations and also the ramp-up of new fields have gone well, and we talked about Johan Sverdrup as one example. So, so far this year, 6% growth in a way. I just want to say that it was actually planned for being -- the growth for the year was planned to be sort of tilted towards the first half of the year based on sort of the ramp-up of Bacalhau, Johan Castberg, and new startups as such. So that was always the plan. But we also say that sort of the expectation for the full year is more robust. But we have decided not to increase the production guidance in a way. So -- but clearly, we will follow this very closely and we will revert in the third quarter on production naturally. So we'll see. We'll keep it as it is, but it is a more robust guidance. Second, the gas price realization in the -- Yes. So if you look at the quarter as such, Henry Hub came in at $2.9 per barrel. Our average gas price in the North was 2.3%, so a discount of [ 0.6 ], which is actually lower than normally is a little bit higher than that normally. In general, we are located in the most attractive acreage and basin with very low unit production costs. So this is -- continues to be a very strong contributor to our results as such. So prices were down compared to last quarter last year by 16%. But still making significant value out of it.

Thank you, Martin. Next one is Fergus Neve, from Rothschild.

Just the one from me. So looking at MMP, which delivered another strong quarter, given the volatility we saw. I was just wondering if you're able to comment on the drivers of the relative mix within the results between gas oil and refining and the movement in those. And then whether you could also comment at all on what you've seen in terms of volatility in gas and oil markets in the current quarter, noting that you've already commented a little on the refining side of things.