Oil and Renewable Upside? This Energy Stock Has It All

Oil prices are surging thanks to an increase in demand paired with a supply shortfall. It’s the exact opposite of the phenomenon experienced last year when there was so much extra oil that futures prices briefly turned negative. Higher oil prices will test the legitimacy of climate pledges, particularly from the oil majors. Most notable are BP and Royal Dutch Shell which slashed their dividends and vowed to cut oil production as part of a permanent shift toward renewables. Rising oil prices could cause some of these players to rethink their commitments. 

However, there is one oil major that will likely stick to its renewable investment strategy — Equinor (NYSE:EQNR). Norway’s energy giant is boldly investing in offshore wind energy. Here’s why Equinor has what it takes to successfully transition to renewable energy. 

Image source: Getty Images.

A brief summary of Equinor’s oil and gas portfolio

Equinor has been drilling the North Sea for 50 years. Even after all that time, engineers continue to come up with new ways to turn a profit from what’s left. The company estimates it still has years of profitable reserves in its portfolio. New discoveries are possible, but the general trend is heading toward less oil. In response, Equinor has cut its oil and gas investments and is focusing instead on profitability.

Norway is Equinor’s bread and butter but it actually only comprises 55% of the company’s assets. In 2020, 64% of production came from Norway, 21% from North America, 9% from Africa, and 6% from various other countries. Aside from Norway, Africa, and Azerbaijan, all of Norway’s other production regions lost money in 2020. 17% of Equinor’s assets are in the U.S., but the region lost Equinor a painful $5.8 billion over the last two years. Norway and the UK were the only two countries where Equinor produced more oil and gas in 2020 than in 2019. Equinor is a top-tier offshore operator. But it’s had more failures than success outside of Norway as of late, which is one reason why it’s focusing on profitability instead of adding production.

By making its existing operations as efficient as possible without investing too much in future oil and gas growth, Equinor has some of the lowest break-even levels of the oil majors. According to its latest estimates, Equinor’s new projects can break even at just $30 per barrel Brent, which is less than half of the current Brent price. If Brent averages $50 in 2021, Equinor estimates it can generate more than triple its 2020 free cash flow (FCF) and nearly double its pre-pandemic 2019 FCF.

At a crossroads 

Equinor’s potentially high FCF generation is impressive, but it’s not because Equinor is necessarily flat-out better than its peers. Rather, it’s mainly the result of not spending a lot of money and milking the reserves it has left. At the tail-end of an era, Equinor isn’t having an identity crisis per se. But it’s certainly at a crossroads of what to do next.

Image source: Getty Images.

Instead of going toe to toe with other oil companies that, quite frankly, are much better positioned than Equinor, the company has decided to leverage its offshore expertise and harness the power of the wind. If the idea that Norway’s oil giant is drastically shifting to wind energy sounds fishy, that’s because it should. After all, we live in a time when virtually every oil company is desperately trying to rebrand itself as a diversified energy company. There are plenty of cases where this is more for positive press than a true business strategy.

Equinor certainly enjoys the positive press, but it also finds itself in a position unlike any other oil major in that its reserves are trending down, it has an impressive amount of wind potential right in its backyard, and it is majority-owned by the Norwegian government — so its interests tend to align with politics. 

Released in January 2021, Norway’s climate action plan involves reducing carbon…