We wrote about Equinor (EQNR) back in December of last year when shares were trading around the $18.60 level. We looked at the strength of the dividend in that article as shares looked very attractive from both a technical and valuation perspective.
Fast-forward two months and the share price has come right back down to the $17.40 level. The principal reason being that the price of crude oil has already lost close to $10 a barrel or 15%+ this year alone.
Equinor at present trades with a forward earnings multiple of 10.6, a book multiple of 1.4, a sales multiple of 0.9 and a cash-flow multiple of 4.2. These numbers are all well behind the 5-year averages of the company. The dividend is now almost yielding 6% per year due to the steep downturn since the start of the year.
Long term, we are bullish on the price of oil. The sector since that multi-year top in 2018 has been very difficult to read. As a result, the clear lack of a sustained trending move in this asset class has caused many investors to head for the exits.
The recent fourth quarter and annual numbers left plenty of room for encouragement. When energy companies have to deal with lower commodity prices, many times they pull back on their production. Equinor, however, is growing production and the break-even price per barrel remains very attractive at less than $35 a barrel.
When we add in the dividend and the buyback programme to this growing low-cost production, we can see a potential long case here already.
To ensure the financials have the wherewithal to keep on growing capex and production, we like to look at the financials to see how its main line items have been trending. Here are how things stands after the firm’s recent 2019 numbers.
What is apparent immediately on the cash flow statement is the amount of depreciation and amortization in the cash from operations segment. When we retrace the depreciation back to the income statement, we can see that the only cash line items which took away from the firm’s gross profit of $23 billion to arrive at net profit was SG&A, interest expense and tax. Therefore, since depreciation is a non-cash item, we can add it back to the company’s net income to work out its operating cash flow.
Equinor’s operating cash flow totaled $13.74 billion in 2019. Although this number does not give us the net profit of the firm, it is an excellent read on how much cash the company was able to generate. This number is essentially the launchpad for the firm’s dividend, capex commitments, share buybacks and debt repayment.
When we go further down the cash flow statement, we can see that over $10.59 billion was used for investing activities. The main investing down was in capital expenditure, acquisitions and marketable securities. In the financing section, we see that $5.49 billion was paid out in 2019. These funds went to repayment of debt ($1.71 billion), the dividend ($3.342 billion) and share buybacks ($442 million). This means that the firm had to use its own cash in reserves to balance up the cash flow statement. The cash balance fell from $7.55 billion in 2018 to hit $5.177 billion in 2019.
This meant that the current ratio dropped somewhat on the balance sheet as well as retained earnings in 2019. Shareholder equity still, though, came in at a very respectable $41.15 billion. This trend though should be short-lived due to the fact that net earnings are expected to rise by approximately 15% this year.
Furthermore, a very popular valuation multiple used in this industry is the popular EV/EBITDA multiple where EV stands for enterprise value (Market cap + debt – cash). At present, Equinor’s EV/EBITDA forward multiple comes in at a very attractive 2.95. This number for example is well behind the sector’s median number of 6.1.
Therefore, to sum up, we have consistently stated that we like to invest in companies where operating cash flow is able to pay for sustained investment, a growing dividend, debt repayment and if possible, share buybacks. Equinor practically did all of the above in 2019 during a very tough commodity environment. Considering what is coming down the track and taking into account the company’s present valuation, there is a lot to like here. We will make a decision here soon enough.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EQNR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.