Equinor: 10%+ Total Yield From This Natural Gas Company (NYSE:EQNR)

Investment Thesis

Equinor (NYSE:EQNR) shares have gone nowhere fast in the past 12 months. It’s not only heavy taxes that have impacted Equinor but high inflationary pressures in marine activities too.

Then, on top of that, natural gas prices in Europe have been highly volatile, which has brought along its own troubles and uncertainties.

Nonetheless, I believe that for 2023, Equinor’s combined capital return program could reach a 10% yield. Thus, I believe that investors would do well to get involved now and buy the dip in this out-of-favor company.

Is This For Real?

Difficult to imagine that after everything that’s taken place in Europe in the last 12 months, Equinor’s share price is barely unchanged.

I exaggerate to make my point. After all, there has been more than a 3% yield from its base dividend, plus the share price is up more than 10%. And on top of that, there have been two combined dividends of $1.20, bringing Equinor’s total yield, including capital appreciation, closer to +18% in the past twelve months.

But for all the drama that has taken place, with Equinor being one of the few companies well-positioned to benefit from Russia’s decision to cut off Nord Stream 1 and 2, one would have expected to see more outperformance.

On the other hand, naysayers can quickly quip that this was always expected. Particularly, given Europe’s decision to heavily tax Equinor.

On yet the other hand, consider how natural gas prices have performed in Europe.

Natural gas prices soared more than 4x pre-invasion to the peak in the summer. And now, prices are down close to 80% from the summer peak.

Put another way, this level of volatility causes problems. It causes problems for Equinor, as they don’t have visibility into how to plan and budget for future production.

Indeed, at what price point should Equinor budget? Should Equinor plan for future production at EUR300 per megawatt hour? Or should Equinor budget for EUR100 per megawatt hour? Or perhaps, EUR70 per megawatt hour is what energy prices will ultimately stabilize at?

Likewise, for investors, this volatility also causes tremendous troubles. Attempting to figure out what sort of future free cash flows Equinor can be expected to make becomes a near-impossible endeavor.

Given this volatility, investors will demand an even wider margin of safety before entertaining the idea of investing in Equinor. After all, the one thing that investors dislike more than bad news is uncertainty. And Equinor carries ample uncertainty. Hence, investors will be unwilling to pay a large multiple for its stock.

On yet the other hand, I must pause and ponder, surely, cash is cash?

Return of Capital After 72% Taxes

I believe that when Equinor reports Q4 results its net debt position will have fallen below $5 billion. This is clearly positive. This means that Equinor’s cash flows in 2023 won’t be used to shore up materially more cash on Equinor’s balance sheet, since its balance sheet is already in a good place.

Hence, this will mean that Equinor will be well-placed to return capital to shareholders.

On the other hand, we have to keep in mind that aside from Equinor’s 72% adjusted tax rate, 2023 will also have to navigate a strong inflationary environment.

On yet the other, after the taxes and after the higher inflationary environment, Equinor is still willing and able to return a fair amount of capital to shareholders.

• Equinor has an $0.80 base dividend, which amounts to a 2.6% yield.
• On top of that, I suspect that special dividends in 2023 could reach somewhere around $1.20 to $1.40, bringing in a further 4.2% yield.
• On top of that, I believe that at least a further $4 billion of buybacks will take place in 2023, equating to a further 4% via buybacks. Note, this figure assumes buybacks are down from $6 billion in 2022.

Next, we’ll turn our focus to Equinor’s valuation.

EQNR Stock Valuation — Priced at 6x 2023 Free Cash Flows

Equinor’s Q3 marked a high point for European natural gas prices.

Since that time, natural gas prices have retreated lower. Nevertheless, by my estimates, I believe that for 2023, Equinor is likely to make approximately $17 to $20 billion of clean free cash flows.

If we take the midpoint, this puts Equinor at 6x next year’s free cash flows.

The Bottom Line

Many investors have looked at recent natural gas dynamics and extrapolated the present conditions over the whole of 2023.

However, I maintain that Europe’s energy security issues have not been solved by a couple of weeks of warm weather.

The events that got us here in the first place have not been dealt with.