The global energy complex is in a state of flux, made worse by the war in Ukraine, overzealous European lawmakers and unpredictable oil exporters, suggests Jon Markman, editor of Strategic Advantage.
Investors should consider buying Equinor ASA (EQNR), a Norwegian energy producer. Equinor was created in 2007 by the merger of Statoil and the oil and gas operations of Norsk Hydro. The business is 67% owned by the government of Norway through its ministry of petroleum and energy. However, Norway is now an extremely green country.
Legislators there are pushing executives at Equinor to move quickly from its primary business of oil and gas development to green energy such as offshore wind farms.
Unfortunately, Eastern Europe is in the middle of a war in Ukraine. Russia is threatening to withhold natural gas from the continent, and the major oil exporting countries have no interest in helping the West sort through the current bottleneck. The bottom line is that Europe is in the midst of a self-inflicted energy crisis.
Lawmakers on the continent were too ambitious cutting back on traditional oil and gas production. Although they are rapidly increasing incentives for green energy, development is coming onstream far too slowly to replace traditional fuels from Russia, and now OPEC. It’s a mess.
Equinor is in the right place at the right time. The company still derives 80% of its income from oil and gas production, however as executives were pushed to get greener, faster, they stumbled into a winning combination. For the past five years executives have been dramatically reducing the footprint of the traditional fossil fuel business. The company is spending far less to procure oil and gas.
The company in 2021 produced energy in only 15 countries. That is down from programs in 30 countries only five years ago. The number of host countries in 2022 should fall to only five.
Fortunately, the company is selling the oil it does produce at record prices, generating huge profits and free cash flow, then returning a lot of that capital to shareholders.
There is also a solid story to tell about Equinor around the transition to green energy. The trend to green energy is one of the biggest current investment themes. Institutional investors are clamoring for companies that meet strict Environmental, Social and Governance criteria. The company claims that by 2030, 50% of revenues will come from low carbon sources.
Shares of Equinor trades at only 7.6x forward earnings and 1x sales. The dividend yield is over 3%. Longer-term investors should consider buying shares on any pullback to the $36 level.
