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Equinor buffeted by transition winds

The re-branded Norwegian state-owned firm needs to convince that its renewables sector can one day compete with its fossil-fuel based upstream revenues

Equinor had the luxury of learning from other majors' rebranding strategies before finally making a name change from Statoil last year. But the relaunching at a later stage of the energy market's evolution has attracted investor scrutiny over the long-term economic realities of recalibrating towards renewables.

As the upstream-focused firm reported quarterly and annual earnings at a capital markets day in January, its leadership said new oil and gas extraction technologies and tougher spending discipline had improved its resilience to price volatility. The share price briefly dipped, but then recovered to over NOK200 ($23.19) after it announced earnings of $4.4bn in the fourth quarter.

But the recent progress-organic-free cash flow reached above $6bn for the full year and production rose to a record 2.1mn bl/d oe-contrasts with the financial realities facing Equinor's long-term prospects. These could beset plans to become a "broad energy company" by building a stronger renewables portfolio.

The eventual aim is to develop the company's renewables sector as a competitor to fossil-fuel based upstream revenues. Among the other "new energy" initiatives forming part of a $12bn strategy over the next 12 years, Equinor plans to leverage its expertise in operating offshore platforms to become a leader in offshore wind.

However, in oil and gas it expects to generate around $14bn in free cash flow from 2019 to 2021, achieving a more than 14pc return on average capital employed (Roace) in 2021. These figures dwarf its current renewables trajectory, which would create free cash flow of just $400mn by 2040, with Roace that hovers around 10pc up until that year, according to analysis by London-based equity research firm Redburn.

The firm also notes that renewables capacity is expected to plateau at just under 2,500MW in 2030 and see no growth for the next 20 years.

For its part, the company's leadership accepts the complexity of the renewables return equation- describing the Equinor re-branding as a necessary paradigm shift that goes beyond the cosmetic.

"Equinor as a company is well prepared for the future to meet the great expectations being placed on us, whether from investors, the young or politicians," says CEO Eldar Sætre. "Climate change is happening and the world needs a comprehensive overhaul of our energy systems."

Hydrocarbons remain core

Sætre estimates that peak demand will hit at 2025, a relatively early date compared to other forecasts. "At some point oil demand will come down, and that is a good thing as we do need alternatives to oil. This transition is about developing alternatives that compete and out-compete oil-but hydrocarbons will continue to be produced as a key part of our portfolio," he says. Oil and gas still provide 12pc of Norway's gross domestic product (GBP) and more than a third of Norwegian exports.

As the time of its re-naming last March, Statoil was the last of the world's top 20 energy companies to include "oil" in its name. The time-lag in the name-change, coming almost 20 years after BP dropped the word petroleum, reflects not just its ownership structure, but also soul-searching, given the company's importance as a national champion in Norway's proud hydrocarbons history.

Statoil was arguably the country's most recognisable brand for almost 50 years. Indeed, its temporary hiatus as StatoilHydro, after a "merger", almost universally recognised as a Statoil takeover of the oil and gas portion of smaller rival Norsk Hydro, and the promise of a new name, took on almost the status of a national joke, as people speculated both on how long before the firm could quietly drop Hydro and how much money was being spent on branding consultants. A new pink lodestar logo was also received somewhat cynically.

Because the government owns 67pc of the company shareholders, politicians and trade unions all had to approve the change to Equinor. But there was also a benefit to the timeline: at its launch, Equinor could both pre-empt and resolutely rebut the predictable "greenwashing" allegations from environmental groups, pointing to renewables assets such as its offshore wind and solar farms. Its other environmental credentials include its industry-leading CO2-efficient production of oil and gas-emissions that are around half the global average.

The environmental burnishments reflect Statoil's unique journey since its inception in 1972. It was almost immediately subjected to political goals, arguably ahead of their time in the industry, such as controlling the pace of extraction, meeting national labour and safety standards, and ensuring environmentally defensible extraction.

A politicisation of the country's energy industry is credited with creating the conditions that led to Norway being seen as 'the model' for avoiding the so-called 'resource curse', and its sovereign wealth fund still owns on average 1.3pc of every single listed company on earth.

'A magical opportunity'

The Statoil story does not only draw from its politicisation and specifically Norwegian experience, it is also heavily entwined with the technological trail-blazing that was needed to succeed in what were then the world's most challenging oil fields. The Equinor leadership sees this heritage as a key asset for its energy transition plans.

"Technology can significantly lower development costs, operating costs, we can increase discovery and recovery rates. We can reduce greenhouse gas emissions, and we can improve safety," Sætre said at US oil services heavyweight BHGE's annual meeting in Florence in January. "It is a magical opportunity."

The focus on technology also reflects the role Statoil played in nurturing the home-grown skills that were essential for the challenging offshore conditions on the Norwegian Continental Shelf (NCS), as Norwegian historian Helge Ryggvik describes in a history of the company.

Statoil's first CEO Arve Johnsen pressured the US' Halliburton-controlled Brown & Root to create a joint venture with Aker (BrownAker). This helped create a training legacy that has since ensured Norwegian engineers and skilled workers can take the lead and innovate on high-profile projects-a far cry from being the "metal bashers" they were derisively called in the early 1970s.

The success of the Norwegian experience led to the end of formal protectionism and the company's partial privatisation in 2001-and Statoil has proved itself equally adept at international expansion in the years since.

Apprentice to master

As of last year, Equinor had a market capitalisation of over $75.2bn and employed ‎20,245 people. As well as dominating the NCS, it operates oil and gas fields in 13 countries and has ventures and processing interests in several more. The reserve-replacement ratio also reached an all-time high of 213pc in 2018, and the firm's break-even price for projects sanctioned last year was just $14/bl.

The company also plans to invest up to $15bn in Brazil alone over the next 12 years to develop oil, gas and renewable energy sources there, achieving an output of between 300,000 and 500,000bl/d oe by 2030.

Back on the NCS, although the Norwegian Petroleum Directorate now expects output to fall to a 31-year low in 2019, Equinor's flagship Johan Sverdrup field is scheduled to start production in November this year. It has as much as 3.2bn bl of oil in place and will enter production at 440,000bl/d in its first phase, contributing to the biggest year-on-year increase in Norway's output since the 1980s.

The expansion into renewables saw the Norwegian firm commission the world's first floating offshore wind farm in 2017, off the coast of Scotland. It is also developing similar farms in Poland, as well as solar energy in Brazil and Argentina. In the UK, its offshore assets are the 317MW Sheringham Shoal, 402MW Dudgeon and 30MW Hywind facilities.

Earlier this year Equinor also acquired Danish power and gas trading firm Danske Commodities for €400mn, saying the move balanced and optimised the renewables portfolio. Last December it exercised an option to acquire a 50pc interest in the offshore wind development project Bałtyk I in Poland from Polenergia, and a month earlier it took a minority 9.7pc stake in solar power producer Scatec Solar for $82.4mn.

"I believe we need to reinvent ourselves to be relevant energy providers for the next generations," Sætre said in Florence. "We operate in highly competitive markets and will increasingly do so. However, we're also moving into an age of more cooperation, which also means a collaborative innovation." Talking of an "integrated and collaborative value chain", he said that this would expand into the broader energy space.

Finding the right mix

Beyond the platitudes and spending targets, the key question is if Equinor's widely admired technological advances in oil and gas extraction-exemplified by the expected efficiency of Johan Sverdup, its innovations in subsea compression process and confidence in taking on Chevron's Rosebank field in the North Sea's west of Shetland province-are transferable to offshore wind. Offshore platforms and their associated supply chains are a clear cross-over, but the company's edge in wind is not a slam-dunk.

Rohan Murphy, an analyst at fininancial services firm Allianz Global Investors, believes it is more important for Equinor to diversify because it depends more on upstream, compared to similar peers like Shell, Total or BP, as "the latter have larger downstream operations that will likely be less impacted by the energy transition".

The company's ability to develop a green fuel "package", offering the right mix of renewables and the greenest fossil fuel-natural gas-will likely prove more important for future returns rather than looking at its "new energy" portfolio in isolation. As the largest NCS gas producer and the second-largest supplier of gas to Europe, it could be well placed to do this.

Sætre said in London that while domestic energy retail is not a model for which Equinor is set up, it is expanding deeper into natural gas and high granularity power trading-for example through the Danske Commodities acquisition-because it will increasingly interact with renewable energy sources.

"What is more important than us trying retail is to be in the power market-we see a lot of risk in renewables and do not want to be cannibalised. We see hydrocarbons from natural gas and renewables as compatible together. You can create an effective resource by combining the two".

Ultimately, Equinor is facing the same challenge as many other oil and gas firms at this time: the inherently sustainable nature of renewables means they are an energy source that is harder to monetise that finite fossil fuels. However, the firm's legacy of openness to innovation and history of environmental discipline could serve it well in what will be a tough transition for company and country.

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