Equinor ASA (EQNR)

Equinor is an oil and gas company. It started as a Norwegian government agency in the 1970s. Now it is publicly traded, though Norway still owns a lot of it. The company drills for oil and natural gas, mostly offshore, and sells what it finds. The biggest operations are in the North Sea near Norway, but Equinor also works in Angola, Brazil, and other places. In recent years the company has started building wind farms and other renewable energy projects. The stock trades on the NYSE under the ticker EQNR. For investors, Equinor is a way to get exposure to energy production and to see how an old-school oil company is trying to become a renewable energy company.

What the Company Does

Equinor finds oil and gas underground (or underwater), pumps it out, and sells it. Most of the world’s oil is found offshore — under the ocean floor. This is expensive and technically hard. Equinor is one of the best at doing it. The company operates oil fields and gas fields. A field can produce for decades. When a field gets old, the company has to spend money to shut it down safely and clean up. The company also refines some of the oil it produces into products like diesel and gasoline. It sells gas by pipeline, sometimes as liquid natural gas (liquefied so it can be shipped). Making money means finding cheap oil and gas, producing it efficiently, and selling it when prices are high.

Equinor has other businesses too. The company sells electricity to the power grid in Norway — energy left over from the oil and gas operations. It is building wind farms, both onshore and offshore, and solar plants. These renewable businesses are growing but are still much smaller than the oil and gas business.

A Brief History

Equinor started in 1972 as Statoil, which stood for “Norwegian State Oil Company.” Norway found enormous amounts of oil and gas in the North Sea starting in the 1960s. The country had no experience with this, so it created Statoil to develop the resource and make sure Norway got its fair share. At first, Statoil was wholly owned by the Norwegian government and basically did what the government told it to do.

Over time, Statoil became a real company. It started to act like a normal oil company, making its own decisions, investing money, looking for more fields to develop. The government wanted to keep Equinor under control but also wanted the company to make money and be competitive. In 1996, Norway sold some shares to the public, so Statoil became partly private. This gave the company more freedom. It started buying other companies and exploring in new countries.

In the 2000s and 2010s, oil prices were mostly high, and Statoil made a lot of money. The company bought assets in Angola, Brazil, and other places. It also grew its business of selling natural gas to Europe through pipelines. When the company first started selling shares publicly, it was called Statoil. In 2018, as the company was trying to signal that it was serious about renewable energy, it changed its name to Equinor.

The Oil and Gas Business

The oil and gas business has a rhythm. A company finds a field, gets permission to drill it, spends billions building platforms and pipelines, starts pumping, and then makes money for years while the field produces. The company has to predict how much oil is there, how fast it will come out, and how long the field will last. Getting these predictions wrong costs billions. The company also has to guess what the price of oil will be. If the price is higher than expected, the company makes more profit. If it is lower, it makes less.

For Equinor, the North Sea is the crown jewel. The fields there are old — most started producing in the 1970s and 1980s — but they are still productive and well-understood. The North Sea is expensive to work in (harsh weather, remote, deep water), but the infrastructure is mature. The company knows how to operate there and has relationships with governments. The government of Norway gets a cut of the profits.

Equinor also produces oil and gas in Angola (the Kizomba fields, producing for many years) and Brazil (the Lula and other fields, discovered and developed more recently). Brazil is a newer business for the company but a promising one. The fields are in deep water, which is technically challenging but potentially very profitable. Angola is stable but faces some resource scarcity — the existing fields will eventually deplete.

Oil and gas companies make money when the price of oil and gas is high. When prices fall, profits fall fast. The cost to drill a field is mostly fixed once you have built it; so if oil costs little, you produce anyway and take the low price. Equinor, like all oil companies, is sensitive to commodity prices, which no company controls.

What Makes It Different

Equinor has some unique characteristics. Most obviously, Norway owns most of it. This means the company has a shareholder (the government) that is not trying to maximize short-term profit. Norway wants steady cash flow and energy security. This shapes how Equinor thinks. The company is careful with risk. It is not the most aggressive explorer, and it does not make crazy bets.

Norway is also one of the best places in the world to be a big company, because the country has rule of law, no corruption, and professional government. Equinor’s government relationship is stable and transparent. Some oil companies operate in countries where the government can seize assets or change the terms of a deal. Equinor does not have that problem in Norway. In Angola and Brazil, there is more risk of political change, but the company manages it.

Equinor is also big and well-run. It has smart engineers, access to capital, and the ability to execute large projects. It has relationships with governments in the places where it works. These advantages matter when you are building a billion-dollar offshore platform.

One more thing: Equinor is a low-cost producer. The North Sea fields have been producing for decades, so much of the big capital spending is already done. Running an existing field costs less than finding and building a new one. Equinor can produce oil and gas profitably even when the global price is moderate, because its costs are below average.

Moving Toward Renewables

In the last several years, Equinor has invested in wind farms and other renewable energy. The company is building offshore wind farms near Norway and onshore wind farms in other countries. It is also investing in hydrogen and carbon capture. Why would an oil company do this? Several reasons.

First, the world is shifting away from fossil fuels. Governments are making rules that favor renewable energy. If Equinor stays purely in oil and gas, it will be worth less over time. Investing in renewables now helps the company transition.

Second, renewable energy can be profitable, at least for large, well-capitalized companies that can invest in big projects and wait for long payoffs. Equinor has the money and the engineering skill to build large wind farms.

Third, Norway the shareholder wants this. Norway has committed to reducing carbon emissions. It wants Equinor to be part of the solution, not just part of the problem.

The renewable energy business is growing but is still small compared to oil and gas. It generates much less cash flow. The company is basically planting seeds for the future while harvesting the profits of its current oil and gas business. This is a slow shift, not a dramatic turnaround.

The Risks

Oil prices can fall hard and stay down. When this happens, Equinor’s profits fall with them. The company can cut costs but only so much; it still has to maintain the equipment and pay for the people who work on the platforms.

Environmental damage or accidents are a constant risk with offshore drilling. A spill or accident would be expensive, bad for public relations, and could trigger new regulations.

The transition to renewable energy is uncertain. Equinor is betting on wind and hydrogen, but no one knows if these will be as profitable as oil and gas. The company could invest billions and then find that the market does not develop the way it expected.

Political risk exists, particularly in Angola and Brazil. A change in government, new taxes, or expropriation could hurt the business.

Climate policy is tightening. Governments are setting rules that limit fossil fuels. Eventually, this could make large parts of Equinor’s current business uneconomical. The company is preparing for this, but it is a long-term headwind.

Understanding the Investment

Reading Equinor requires understanding both the oil and gas business and the renewable energy business. The annual report breaks down revenue by geography and business segment. Quarterly reports show production numbers (barrels of oil, cubic meters of gas) and realized prices.

Key things to watch: production volumes from the main fields, realized prices (what the company actually sells oil and gas for, which may differ from global spot prices due to timing and contracts), capital spending (how much the company is investing in new projects versus maintaining existing ones), and cash flow from operations.

Also watch the renewable energy segment. How much is the company producing? How much more is it planning? Is this business profitable or is it burning money while the company waits for growth?

Look at the 10-K filing (SEC CIK 0001140625) for detailed information on reserves, production costs, and planned spending. The quarterly earnings calls reveal management’s view of oil prices, upcoming projects, and risks.

Equinor is a good investment for someone who wants exposure to oil and gas production and believes that energy demand will remain strong for decades. It is a less good investment for someone who believes that oil and gas are about to be phased out quickly. The company pays a dividend, which is significant and stable. The stock price moves with oil prices — when oil is expensive, the stock tends to go up; when oil is cheap, the stock goes down. Investors need to be comfortable with that volatility.

See also: Royal Dutch Shell, TotalEnergies, ConocoPhillips, oil and gas industry, energy transition, renewable energy