Following Its Q1 Results, Equinor Stock Is Still A Hold (NYSE:EQNR)

Introduction

As an investor focusing on dividend growth stocks, I always look for new opportunities to invest in income-producing assets, mainly equities. I add to my existing positions when I find them attractive. I also use market volatility to my advantage by starting new positions to diversify my holdings and increase my dividend income for less capital.

The energy sector is interesting, Equinor in particular. I covered EOG Resources (EOG) in my last article, and this time I return to Equinor (NYSE:EQNR) following its Q1 results published on Thursday. Equinor is controlled by the Norwegian government, which holds 67% of the shares. Therefore, the company is conservatively run and is poised to succeed even during recessions or when demand is lower.

I will analyze Equinor using my methodology for analyzing dividend growth stocks. I am using the same method to make it easier to compare researched companies. I will examine the company’s fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it’s a good investment.

Seeking Alpha’s company overview shows that:

Equinor ASA, an energy company, engages in the exploration, production, transportation, refining, and marketing of petroleum and other forms of energy in Norway and internationally. It operates through Exploration & Production Norway, Exploration & Production International, Exploration & Production USA, Marketing, Midstream & Processing, and Renewables. The company also transports, processes, manufactures, markets, and trades in oil and gas commodities, such as crude and condensate products, gas liquids, natural gas, and liquefied natural gas. The company was formerly Statoil ASA and changed its name to Equinor ASA in May 2018.

Fundamentals

Revenues have increased by almost 35% over the last decade. The increase in sales is attributed to higher energy prices and higher production by Equinor as it attempts to support the European demand for oil and gas following the war in Ukraine. The gas price has skyrocketed in Europe, which is $19 per MMBtu (Metric Million British Thermal Unit) compared to the $3.2 MMBtu Americans pay. Still, the company has missed the sales estimates by $500 million. In the future, as energy prices keep declining compared to Q1 2022, analysts’ consensus, as seen on Seeking Alpha, sees roughly a 10% annual decline in sales in the coming three years.

The EPS (earnings per share) has increased much faster. The increase in demand for natural gas has sent the price upward. The cost of producing every MMBtu hasn’t changed significantly, and therefore the margins have increased considerably, and the EPS has increased much faster than the sales. As EPS has more than quadrupled in a decade, Equinor has produced significant cash. However, the company can’t rely on such margins as Europe is working on lowering its dependence on natural gas. Therefore, analysts, as seen on Seeking Alpha, expect that the 2025 EPS will be more than 30% lower than the 2023 EPS.

The dividend policy of Equinor is different from that of major American energy companies. The company is more conservatively run and, therefore, will not prioritize dividends when they cannot be covered by cash flow. Thus, the payment is more erratic, the payout is low, and the current yield is roughly 2%. On the other hand, the company pays special dividends to supplement the conservative dividend. Investors who seek an ever-growing, extremely reliable dividend will not find it with Equinor.

For the first quarter, the Board approved a regular cash dividend of $0.30 per share, which was a 50% step up from last quarter. In addition, an extraordinary cash dividend of $0.60 per share makes the total cash dividend $0.90.

(Torgrim Reitan – EVP & CFO, Q1 conference call)

In addition to dividends, companies return capital to shareholders via buybacks. Buybacks allow companies to accelerate EPS growth by lowering the number of shares outstanding. Equinor has not been very active in the buyback realm, and over the last decade, the number of shares has decreased by 2.5%. Additional buybacks when the share price is low will be an effective way to improve the growth of the EPS, even when energy prices are sluggish. The company announced in its Q1 report that it continues to execute a $6B buyback plan.

We continue to execute a $6 billion share buyback program for this year.

(Torgrim Reitan – EVP & CFO, Q1 conference call)

Valuation

The P/E (price to earnings) ratio of Equinor stands at 5.7 when using the 2023 forecasted EPS. The current valuation is very low, and it will stay soft even after the EPS keeps declining as the energy prices will stabilize. The P/E ratio, when using the 2025 EPS…