Morningstar: Energy Quality Stock Equinor is Undervalued, Still Has 20% Upside

Equinor is accelerating its push into renewable energy in pursuit of its 2050 net-zero goal. Central to its strategy is the growth of its burgeoning offshore wind business. While net installed capacity only stands at 0.7 gigawatts at end-2021, Equinor plans to grow that to 12-16 GW by 2030, a target it previously set for 2035. To do so, it plans to increase renewable spending from 12% of total capital investment to over 50% by 2030, including a cumulative gross of $23 billion over the next five years.

Capital will also go toward carbon transportation and storage, like its Northern Lights project, and clean hydrogen projects where Equinor plans to leverage its experience in each area to develop its pipeline of projects with the aim of becoming an industry leader. The strategy contrasts with many peers as it's more focused and related to existing operations than peers, which are pushing into all varieties of renewable power generation or distribution and low-carbon businesses.

Despite the growth in renewables, oil and gas will remain the cash flow and earnings driver for the foreseeable future. Wind power capacity growth should accelerate mid-decade and earnings won’t be material until the end of the decade. Equinor’s hydrocarbon strategy mimics peers as it is focused on investing in its highest-quality assets while divesting smaller, noncore areas. New projects coming on stream by 2030 break even at less than $35/barrel and pay back in less than 2.5 years on average according to Equinor.

Internationally, Equinor is prioritizing free cash flow from its operations by focusing on key projects in fewer offshore areas such as the Gulf of Mexico, Canada, and Brazil where returns should exceed 20%.

Equinor has made great progress on reducing capital spending, improving its cost structure, and bolstering the economics of projects under development. Also, Equinor is reversing years of declining volumes on the NCS and developing projects that will leverage its expertise and existing infrastructure. New projects should add 700 mboe/d through 2026, resulting in a 2% compound annual growth rate. This should lead to the addition of higher-margin, lower-capital barrels, which will improve returns from recent levels.

Discovered resources during the last two years have a break-even of $30/bbl while the company has identified1.5 billion boe of volumes improved oil recovery techniques that leverage existing infrastructure and break even at $25/bbl.

Morningstar increased the fair value estimate to $40 from $26 per share after the inclusion of the latest strategic and financial plan and updated oil price forecast. The increase in oil and gas prices since our last update constitutes the bulk of the increase. The fair value estimate corresponds to a forward enterprise value/EBITDA multiple of 1.5 times the 2022 EBITDA forecast of $83.5 billion, which is well above the midcycle estimate largely due to elevated European natural gas prices.