As part of our ongoing series here at The Acquirer’s Multiple, each week we focus on one of the stocks from our Stock Screeners, and why it’s possibly a deeply undervalued gem.
The Stock this week is:
Equinor ASA (EQNR)
Equinor ASA is a Norwegian state-owned multinational energy company headquartered in Stavanger, Norway. It is primarily a petroleum company operating in 36 countries with additional investments in renewable energy. The current company was formed by the 2007 merger of Statoil with the oil and gas division of Norsk Hydro.
As of 2017, the Government of Norway is the largest shareholder with 67% of the shares, while the rest is public stock. The ownership interest is managed by the Norwegian Ministry of Petroleum and Energy. The company is headquartered and led from Stavanger, while most of their international operations are currently led from Fornebu, outside Oslo.
A quick look at the share price history (below) over the past twelve months shows that the price is up 24.54%.
Source: Google Finance
One of the metrics we use in our screens is IV/P (Intrinsic Value to Price). Let’s simplify what it means:
IV/P (Intrinsic Value to Price) tells you if a stock is a good deal or not based on how much value you’re getting for the price you pay. Here’s how it works:
- The Calculation: It adds up the stock’s ability to make money (Earning Power), grow (Incremental Growth), and pay back investors (Shareholder Yield). This gives you an idea of what the stock is really worth, called its Implied Value.
- The Meaning of IV/P:
- If IV/P is greater than 1, it means you’re getting more value than you’re paying for. For example, for every $1 you invest, you’re getting more than $1 of value. That’s a good deal!
- If IV/P is less than 1, it means you’re getting less value than you’re paying for. For example, for every $1 you invest, you’re getting less than $1 of value. That might not be a great deal.
- What It’s Used For:
- It’s a quick way to spot undervalued stocks (good deals).
- If IV/P is very low, like 0.6 (you’re only getting 60 cents of value for $1), it’s likely overpriced.
- Important Note: This is just an estimate. Other factors, like market trends or company issues, can affect how accurate this is.
So, IV/P helps investors find stocks that are “cheap” based on how much value they give back. Higher is usually better!
We currently have an IV/P of 5.40 for Equinor ASA, which means the stock’s Implied Value is calculated to be 5.40 greater than its current price. In simpler terms:
- For every $1 you invest, you’re potentially getting $5.40 of value.
- This is an extremely high ratio, which might suggest the stock is deeply undervalued or that there’s some mispricing or unusual calculation in the data.
Reasons for the undervaluation:
Summary of Equinor’s Q3 2024 Earnings Call
Key Takeaways:
- Financial Performance:
- Delivered adjusted operating income of $6.9 billion and IFRS net income of $2.3 billion.
- Year-to-date cash flow from operations after tax reached $14 billion.
- Adjusted EPS of $0.79.
- Declared $0.35/share ordinary and $0.35/share extraordinary dividend. Fourth tranche of a $1.6 billion share buyback program begins shortly.
- Revised 2024 CapEx guidance to $12-13 billion, reflecting project timing and currency impacts.
- Operational Highlights:
- All-time high gas production from Troll Field, with an 8% increase in NCS gas production.
- Johan Sverdrup field set a daily record of 756,000 barrels and achieved 1 billion barrels cumulative production in five years.
- Renewables production grew by 82% year-over-year, though Dogger Bank A’s commercial production was delayed to late 2025.
- Strategic Moves:
- Acquired a 9.8% stake in Ørsted, leveraging lower valuations amid offshore wind challenges.
- Reaffirmed focus on value over volume in renewables and energy transition.
- Northern Lights CO2 storage facility completed on schedule and budget.
- Challenges:
- Cost pressures due to inflation, turnarounds, and currency effects.
- Some uncertainty in U.S. production due to curtailments.
- Delays in renewable projects like Dogger Bank and uncertainties related to Rosebank.
- Gas Market Outlook:
- European gas prices remain volatile but are underpinned by strong demand and storage uncertainties.
- No plans to hedge gas sales, maintaining full exposure for shareholders.
- Safety and Reliability:
- Strong emphasis on safety following an incident on the Sleipner platform.
Strengths and Opportunities:
- Resilience in Core Operations: Equinor’s upstream oil and gas portfolio remains robust, with the NCS delivering solid growth and contributing to reliable cash flow.
- Strategic Acquisitions: The Ørsted investment provides countercyclical exposure to offshore wind, aligning with long-term renewable goals at lower upfront costs.
- Gas Market Advantage: Positioned well to benefit from European gas price volatility and increasing LNG demand in Asia.
- Operational Excellence: High production levels and cost control on flagship projects like Johan Sverdrup highlight Equinor’s technical capabilities.
Risks and Challenges:
- Renewables Execution: Slower-than-expected progress on major renewable projects could delay growth in low-carbon segments.
- Cost and Inflation Pressures: Rising costs in both traditional and renewable projects may impact margins and returns.
- Geopolitical and Market Volatility: European energy markets remain fragile, with risks from weather, LNG competition, and supply disruptions.
Capital Discipline:
Equinor has demonstrated a balanced approach to capital distribution, committing to $8-10 billion in distributions for 2025 while maintaining a strong balance sheet. The company’s focus on value-driven investments, rather than chasing volume, positions it well for long-term profitability.
Conclusion:
Equinor remains a strong performer in traditional energy while cautiously navigating its renewable transition. Its strategic investments, coupled with disciplined capital allocation, ensure stability and potential growth, but execution risks in renewables warrant close monitoring.
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