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Norwegian oil giant Equinor (NYSE: EQNR) -- formerly Statoil -- has been playing it incredibly safe lately with its strategic plan. Rather than focus on growing production, the company has focused almost exclusively on squeezing every cost efficiency possible from its operating and capital spending. That focus on costs and improving returns worked out rather well this past quarter. While its net income result was a little lower than expected, the company is generating loads of cash and has improved its returns to some of the best among the big oil players.
Here's a brief look at the company's most recent results and what investors can make of Equinor's conservative approach to the oil and gas industry today.
By the numbers
| Metric | Q4 2018 | Q3 2018 | Q4 2017 |
|---|---|---|---|
| Revenue | $22.43 billion | $19.13 billion | $17.11 billion |
| Net income | $3.37 billion | $1.66 billion | $2.57 billion |
| EPS (diluted) | $1.01 | $0.50 | $0.77 |
| Operating cash flow | $4.20 billion | $5.4 billion | $1.72 billion |
Data source: Equinor earnings release. EPS = earnings per share.
This past quarter's earnings result benefited immensely from several one-time gains, the largest of which was a $1.19 billion gain in the valuation of its inventories and futures contracts. These kinds of fair value accounting gains are paper gains that don't affect how much cash is coming in or out the door at any given time.
Even after these gains are taken into account, this was a respectable quarter for the company. Earnings for its upstream segments suffered slightly from lower price realizations compared to the prior quarter, but it remained solidly profitable and generated more than enough cash to cover all capital spending and dividend payments for the quarter. It even had a considerable buildup in cash for the quarter that helped to lower its net debt load.
Data source: Equinor. Chart by author.
The highlights
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Equinor's total production for the quarter was 2.17 million barrels of oil equivalent per day. Compared to last year, it was an increase of 2%. All of its production gains came from its international operations, which offset a 4% production decrease in its home country of Norway.
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Between its exploration efforts and several acquisitions in the year, the company's reserve replacement ratio -- total new reserves discovered divided by total produced -- was 213%, and its three-year average is 153%. With these additions, Equinor has 8.7 years worth of reserves at current production rates.
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As part of its year-end presentation, the company gave a timetable for its production adds between now and 2022. Management estimates its projects in execution will add about 840,000 barrels of oil equivalent per day, but will only likely be 3% annualized growth when you add in planned divestments and natural field decline.
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Thanks to considerable cash generation for the year, Equinor was able to reduce its net debt ratio from 29% to 22.2%.
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For 2019, management intends to keep capital spending relatively flat, with $11 billion in total spending and an additional $1.7 billion for exploration.
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The board approved a 13% increase to its dividend for an annualized amount of $1.04 per share. At today's price, that gives it a dividend yield of 4.56%. The dividend increase has to be approved by the shareholders at its next annual meeting, though.