Equinor : Q4 2021 transcript PDF 206 KB

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EQNR.OL - Q4 2021 Equinor ASA Earnings Call and Capital Markets Update

EVENT DATE/TIME: FEBRUARY 09, 2022 / 11:00AM GMT

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FEBRUARY 09, 2022 / 11:00AM, EQNR.OL - Q4 2021 Equinor ASA Earnings Call and Capital Markets Update

C O R P O R A T E P A R T I C I P A N T S

Alasdair Cook Equinor ASA - Executive VP of Exploration & Production International (EPI)

Anders Opedal Equinor ASA - President & CEO

Irene Rummelhoff Equinor ASA - EVP of Marketing, Midstream & Processing (MMP)

Kjetil Hove Equinor ASA - EVP of Exploration & Production Norway (EPN)

Pål Eitrheim Equinor ASA - EVP of Renewables (REN)

Peter Hutton Equinor ASA - SVP of IR

Ulrica Fearn Equinor ASA - Executive VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Anders Kirkhorn Rosenlund SEB, Research Division - Analyst

Anders Torgrim Holte Kepler Cheuvreux, Research Division - Equity Research Analyst

Biraj Borkhataria RBC Capital Markets, Research Division - Director, Co-Head of European Energy Research Team & Lead Analyst Christyan Fawzi Malek JPMorgan Chase & Co, Research Division - MD and Head of the EMEA Oil & Gas Equity Research

Jason S. Kenney Banco Santander, S.A., Research Division - Head of European Oil and Gas Equity Research

John A. Schj. Olaisen ABG Sundal Collier Holding ASA, Research Division - Co-Head of Research

Lydia Rose Emma Rainforth Barclays Bank PLC, Research Division - Director & Equity Analyst

Martijn Rats Morgan Stanley, Research Division - MD and Head of Oil Research

Mehdi Ennebati BofA Securities, Research Division - Director & Research Analyst

Oswald C. Clint Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

Peter James Low Redburn (Europe) Limited, Research Division - Research Analyst

Teodor Sveen-Nilsen Sparebank 1 Markets AS, Research Division - Research Analyst

P R E S E N T A T I O N

Peter Hutton - Equinor ASA - SVP of IR

Ladies and gentlemen, I'm really pleased to welcome you to the presentation of our fourth quarter and full year results and our capital markets update. We would have preferred, of course, to have done this in person, but that's not been possible this time. So we'll try to make it as real as we can live with you from here in Oslo.

We will have presentations from Anders Opedal, our Chief Executive Officer; and Ulrica Fearn, our Chief Financial Officer, of around 20 to 25 minutes each. Then we'll have a question-and-answer session of around 45 minutes with Anders and Ulrica, but also all of the EVPs who are here with us in the room today and also some of those who will be leading the breakout sessions afterwards for those of you who have signed up. We expect to close the call around 1:45 Norwegian time.

We've got a lot to get through. So let me please pass over through to Anders Opedal. Thank you, Anders.

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FEBRUARY 09, 2022 / 11:00AM, EQNR.OL - Q4 2021 Equinor ASA Earnings Call and Capital Markets Update

Anders Opedal - Equinor ASA - President & CEO

Thank you very much, Peter, and good morning, everyone, and welcome. I really look forward to presenting our strong results and Capital Markets Update together with my team today. I will focus on 3 main topics. First and foremost, we report earnings at record level due to our strong operational performance and the high prices. This is also the basis for our increased capital distribution. I will come back to that.

Second, we continue to progress on our 3 strategic priorities. We turn ambitions into actions for optimized oil and gas, high-value growth in renewables and developing new market opportunities in low-carbon solutions.

Third and finally, we announced a step-up in our climate ambitions. By 2030, we aim to reduce our group-wide net emissions by 50% while maintaining high value creation and growing returns.

Let me start with our strong results for 2021. Last year, we saw continued impact from the pandemic and unstable and increasing energy prices. We focused on protecting our people, safe and reliable operations and cost and capital discipline. I am incredibly proud of our people and partners delivering very strong results, both operational and financial during a pandemic that has impacted our lives.

Safety is my most important responsibility. The serious incident frequency has a positive trend, and we have achieved our best result to date. We will continue the collaboration with our employees and safety delegates, partners and suppliers to improve our shared safety results. Our goal, always safely home from work every day.

Our strong operational performance laid the foundation for our financial results in 2021, both for earnings after tax and cash flow are very strong. We reduced the unplanned losses on our producing assets by almost 30% compared to the 5-year average.

In 8 months last year, Johan Sverdrup achieved nearly 100% production efficiency and delivered 230,000 barrels per day to Equinor. Strong operations, new wells and fields onstream and optimized gas production increased our production by more than 3%, above the 2% expected for the year. We achieved adjusted earnings of $10 billion after tax. Our free cash flow for the year ended at $25 billion after tax and capital distribution. The cash flow is improved from the temporary tax regime and the phasing of tax payments on the Norwegian Continental Shelf.

Return on capital employed was 23%, 23% in 2021, well above the range we gave in June. Optimizing our oil and gas portfolio is about creating value while improving and reducing emissions. For 2021, we achieved an upstream intensity of 7 kilo CO2 per barrel of oil equivalent. It was improved by lower emissions, portfolio changes and high production, including volumes from the electrified fields, Johan Sverdrup and Martin Linge.

Our Renewable business booked substantial capital gains of $1.4 billion in 2021. We delivered solid operations, securing high availability from our wind farms. The last 2 years have demonstrated the large price movements our sector is exposed to. And this winter, the energy realities in Europe have demonstrated the importance of stable and reliable deliveries of gas from Norway. Currently, we see low inventories, low spare capacity and too low energy investments over time. In the breakout session later, Irene will share some details on what impact we expect.

This complexity in the energy markets adds to the challenge of transforming the energy system while providing enough energy. The energy transition is necessary, but must also be balanced to ensure energy security and affordability. Achieving the net zero targets of society and industry will depend on growth in renewables and low-carbon solutions. We are positioned to create value as these markets develop. With our technology, capabilities and customers, we can shape value chains and grow profitability, all while remaining competitive with low cost and low emissions from production of oil and gas.

As European gas demand surged last autumn, we turned every valve to increase volumes. New measures were taken. And for 2021, we increased our production of gas to Europe by more than 5%. We delivered operational excellence when European households and industry needed it most. And for fourth quarter, we delivered 16.5% more gas to Europe than the same quarter in 2020. This was enabled by operational performance of almost 100% production efficiency on our onshore gas facilities. The strong competence and efforts of our people and suppliers made this possible.

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FEBRUARY 09, 2022 / 11:00AM, EQNR.OL - Q4 2021 Equinor ASA Earnings Call and Capital Markets Update

Looking ahead, the global supply chain disruptions and growing inflation are a shared concern for all industries. We will remain focused on cost and improvements and working on mitigating the inflation pressure. We know from experience that we must work closely with suppliers, mature and improve the projects, use design-to-cost methodology and ensure strict capital discipline, only sanction projects when they are good enough.

Since the Capital Markets Day last summer, our ambitions are being put into action. We optimize our oil and gas portfolio. Martin Linge and Troll Phase 3 were put on stream, both ramping up successfully. Troll Phase 3 is already paid back. And Martin Linge is expected to be paid back during 2022. And on that note, Aasta Hansteen, which started production in late 2018, is already paid back as well. Kjetil will elaborate on our progress on the Norwegian Continental Shelf.

We focus our international portfolio on high-value assets and have exited 6 countries and 7 assets. Al will share more on the progress internationally, but let me mention Bacalhau. Phase 1 was sanctioned last summer and is 50% complete towards first oil in 2024. Last year, we made 8 commercial discoveries with 125 million barrels of oil equivalent net to Equinor. We focus our exploration strategy on value creation with prospects near infrastructure with short payback time and low emissions.

Our oil and gas portfolio is expected to create significant free cash flow with an outlook of more than $40 billion in the period 2022 to 2026. And remember, this is in a $65 Brent scenario. In Renewables, we continue our progress pursuing high-value growth. In Korea, we have entered into collaboration to develop 3 gigawatt of offshore wind projects. We have secured additional capacity and have a competitive renewables portfolio.

Our flagship projects are progressing with Dogger Bank A and B well on track towards first power in 2024. Dogger Bank C has secured financing, and final investment decision has been made.

The floating wind farm, Hywind Tampen, is on track for start-up later this year and will support decarbonization of Gullfaks and Snorre.

The competition in the renewable industry has increased over the last years. We remain value driven and maintain our expectation of real base project returns of 4% to 8%. In Low Carbon Solutions, our technology and competence position us well. We are receiving increased interest from our customers in the development of hydrogen value chains and carbon transport and storage. In U.K., our low carbon portfolio is progressing. We reached a milestone when East Coast Cluster was selected as one of U.K.'s first carbon transport and storage projects. With the price development we have seen for CO2 in Europe, the market for transport and storage is emerging.

Northern Lights is well on track to start up in 2024, and 4 potential customers have been granted EU funding for carbon capture. Our ambition is to have a capacity to transport and store 15 million to 30 million tonnes of CO2 per year by 2035.

We have the actions in place to create high value while transitioning to deliver energy in a low-carbon future and achieve our net zero ambition. In a $65 scenario, we expect to generate a free cash flow of around $25 billion towards 2026. This means our return on capital above 14% towards 2030 and speaks to the profitability of our portfolio. We expect more than 30% of our gross investment to be in renewables and low carbon solutions by 2025 and more than 50% by 2030. Over a year ago, we stated our ambition to become a net zero company by 2050. Since then, the pathway to get there has been part of every major discussion and decision. By cutting emissions and increasing our capacity in renewables and low-carbon solutions, our ambition is to reduce the net carbon intensity by 20% by 2030 and 40% by 2035.

The world needs deep and rapid emission cuts already this decade to get net zero by 2050. Our efforts are twofold. First, we take action on our own emissions. Second, by developing renewables and low-carbon solutions, we will make new business by helping our customers to decarbonize.

Today, we launched a step-up of our climate ambitions, focusing on reducing emissions under our own control. I'm pleased to present our new group-wide ambition, a net 50% reduction of emissions from our operations Scope 1 and 2 by 2030 compared to 2015. We aim for 90% of this to be delivered as absolute reductions. The new ambition is aligned with the Paris Agreement of a 1.5-degree pathway.

We are not starting from scratch. Since 2015, we have cut emissions from operations significantly. Our solid pipeline of abatement measures will help us cut emissions while maintaining high-value production from oil and gas. On the Norwegian Continental Shelf, power from shore will be an important contribution. We have several electrification projects in execution and under development.

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FEBRUARY 09, 2022 / 11:00AM, EQNR.OL - Q4 2021 Equinor ASA Earnings Call and Capital Markets Update

In our international projects, we are taking advantage of offshore combined cycle technology, reducing emissions. Our ability to grow cash flow and returns comes from being a solid company. We focus on continuous improvement, cost control and capital discipline. Carri will share more on how we use technology and digitalization in our improvements efforts. By [2025] (corrected by company after the call), we aim to improve cash flow by $4 billion in total. We will continue to invest in our attractive portfolio. We are working proactively to reduce effects of cost pressure and inflation and further improve profitability in the projects. Ulrica and Arne Sigve will elaborate on this.

We will maintain stable investments in our profitable oil and gas portfolio while investing in high-value growth in renewables and low-carbon solutions. Overall, we maintain our guided CapEx level from June for 2022 to 2024. Our balance sheet is solid, with net debt below 0, providing for strong credit ratings. This gives us access to capital at competitive terms. We maintain our ambition for our net debt ratio between 15% to 30%.

Our balance sheet is also a competitive advantage. For us, project financing is a commercial option, not our requirement. Our capital distribution remains competitive. And we have been firm in executing our policy and grow annual cash dividend, in line with long-term underlying earnings. The share buyback program launched last summer has been executed efficiently, Including the share buyback program launched in 2019, we have bought back 130 million shares, including the government share.

At our Capital Markets Day in June, we presented our capital distribution framework. Our dividend policy remains firm. We aim to grow the annual cash dividend in line with long-term underlying earnings. Typically, this has been an annual increase of $0.01 to $0.02 per share in the quarterly dividend, announced together with our fourth quarter results. We increased our quarterly dividend to $0.18 per share at the Capital Markets Day. The Board will propose to the Annual General Meeting to further increase in the cash dividend to $0.20 per share per quarter for fourth quarter 2021.

Also, at the Capital Markets Day, we announced a share buyback program at a level of $1.2 billion annually from 2022, with the option to use -- to be used more extensively to optimize capital structure. The USD 1.2 billion annual level can be expected, assuming an oil price in or above a range of $50 to $60 per barrel and expected net debt ratio within the 15% to 30% ambition and pending commodity prices.

Already in third quarter, we demonstrated our willingness to use share buyback more extensively. We increased the second tranche last year from $300 million to $1 billion. The Board proposes an increase up to $5 billion, including the government share for 2022. This is subject to the normal renewal of the Board authorisation of the Annual General Meeting in 2022.

The first tranche of $1 billion, including the government share, will start in the market tomorrow. This is lower than the annualized rate of $5 billion due to the narrower trading window this quarter. This level will be assessed quarterly, and we expect the level to remain at $5 billion in 2022 when commodity price outlook is strong and the development in the balance sheet is supportive.

In addition, the Board proposes an extraordinary quarterly cash dividend for $0.20 per share for 4 quarters, starting from the fourth quarter 2021, subject to approval of the Annual General Meeting. The extraordinary quarterly cash dividend is backed by high commodity prices in the second half of 2021 and strong earnings outlook -- second half of 2021 strong earnings and outlook.

The total proposed distribution is cash dividend of $0.20, extraordinary cash dividend of $0.20, share buyback of up to $5 billion during the year, which potentially represent another $0.40 per quarter in 2022. The proposals and required authorisations will be presented to the Annual General Meetings in May 2022. This equates to a total capital distribution for 2022 of up to $10 billion in total, of which around half is expected to be in cash dividends and half in share buybacks. This demonstrates our commitment to offer attractive shareholder returns.

So, let me sum up our main messages. We are on track to deliver on our focused strategy and accelerate the transition. We are progressing our portfolio in renewables and low carbon solutions, and have set a new group-wide ambition of net 50% emission reductions by 2030. In 2021, we delivered strong operational performance, adjusted earnings after tax of $10 billion and net cash flow of $25 billion. This enables us to deliver competitive shareholder returns while investing in the energy transition.

Thank you all for the attention, and I really look forward to your questions later. I also have the full and my great team with me that will join for the Q&A. So now Ulrica, the floor is yours.

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