Beyond the obvious tragedy in human terms of the war crimes being created by Putin’s army, the conflict has had a profound effect on the global oil and gas market, asserts Glenn Rogers, contributing editor Internet Wealth Builder.
Europe in general, and Germany in particular, receive a significant amount of their oil and gas needs from Russia. The Europeans will have to adapt to this new reality as quickly and thoroughly as they can.
There will be several solutions that will have to be deployed. These will include extending the life of existing nuclear power facilities, increased use of renewables, and searching for additional sources of oil and gas from friendly countries like Canada, Norway, and the UK.
As much as we would prefer not to profit from other people's misery as investors, we must seize the opportunities that present themselves. I’d like to draw your attention to one little-known company that is likely to benefit from the increased need for alternative sources of oil and gas as well as a larger percentage of power from renewables.
That company is Equinor ASA (EQNR) which is majority owned by the Norwegian government. It provides energy to over a million European homes. Most of the production is from Norwegian operations but 36% is from outside of Norway.
The company operates in 30 countries and has 20,000 employees. It has Canadian operations in Newfoundland and Labrador. Equinor has been drilling for oil for over 50 years. It is one of the premier offshore providers and is used to working in intense and difficult conditions.
The company is extremely well run, despite being a captive of its government, and it should be noted that the government imposes a heavy 78% tax on the business.
Despite this, the company has been very shareholder friendly both in terms of the capital appreciation of the stock as well as the dividends it pays. These include regular payouts plus special dividends when the price for commodities is especially high, as they are today.
The company increased its dividend in the fourth quarter of 2021 to $0.18 per share (figures in US dollars). It also declared a $0.20 per share extraordinary cash dividend for the fourth quarter of 2021 and has already announced another one for the third quarter of 2022.
The company also has a $5 billion annual share buyback program. That is likely to increase along with the dividends if the prices for gas and oil remain at these elevated levels, which appears to be the case for the foreseeable future. The share buyback is subject to Brent oil prices being at or above the range of $50 to $60 per barrel. They're almost double that right now.
Equinor’s net debt ratio was expected to be within the guided range of 15% to 30%. But given the high oil and gas prices, it is likely to be much lower than that now, so both the regular dividend and the extraordinary cash dividend, along with the annual share buyback, are extremely secure for the rest of this year and likely into 2023 as well.
Last year the company had nearly $4 billion in adjusted earnings. That figure will likely be much higher when this year is completed.
For those investors who are particularly interested in sustainable energy, the company is highly attuned to these new realities and is participating in all the major global agreements. It is investing heavily with other partners in carbon capture and the development of renewable resources, particularly wind and solar technology.
Norway, like Canada, is highly supportive of green initiatives, so this company is unusually attuned to these goals, well beyond what most hydrocarbon majors are likely to support.
The UK and France have just announced major increases in support for wind and energy production. These will benefit Equinor, along with some of their other partners.
The company is also heavily invested in emerging technology of blue hydrogen, which most observers believe will be the next best and cleanest form of energy as the world adapts to a lower carbon footprint.
Equinor is vertically integrated, from exploratory drilling to development and production. It has its own pipelines and owns ships, tankers, and power stations. It is also heavily involved in processing, refining, and energy storage. Finally, it markets its oil, gas, and electricity, so it has full control of the value chain.
The company is also building an undersea pipeline, which should be completed sometime this fall. It will take oil directly to Europe through Holland and Denmark, which would further reduce the dependency on Russian oil. And the company has committed to increasing production to help make up for the shortfall created by the Russian invasion.
This is a particularly good time to be in the oil and gas business adjacent to Europe and a very good time to be in all elements of the energy supply chain, including renewables. So, despite the high taxes the company must live with, it’s still able to return a significant amount of money to shareholders and that is likely to continue in the future.
Obviously, the shares of this company have already moved a great deal, along with others in the oil and gas business. But in my view, this crisis is not going to end anytime soon, and Norway is perfectly situated to benefit from the European difficulties.
Equinor offers a consistent payout that yields 1.9% without considering special dividends, along with the share buyback. We can expect increased production in 2022. I see this as an excellent holding for the years to come, even if there will be volatility along the way as the price of oil and gas ebbs and flows.
Action now: Buy with a target of $50.