Equinor ASA: Second Quarter 2020 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the unaudited financial results for Equinor ASA for the second quarter ended June 30, 2020. The period was characterized by the global impact of the Covid-19 pandemic and historically low commodity prices. Equinor reported adjusted earnings of USD 0.35 billion and adjusted earnings after tax of USD 0.65 billion. In contrast, IFRS net operating income was negative USD 0.47 billion, and IFRS net income was negative USD 0.25 billion. The company restructured its reporting segments effective Q2 2020, separating Exploration & Production (E&P) USA from E&P International.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Adjusted Earnings | USD 0.35 billion | USD 3.15 billion | (89%) |
| Adjusted Earnings After Tax | USD 0.65 billion | USD 1.13 billion | (43%) |
| IFRS Net Operating Income | (USD 0.47 billion) | USD 3.52 billion | N/A |
| IFRS Net Income | (USD 0.25 billion) | USD 1.48 billion | N/A |
| Total Equity Production | 2,011 mboe/day | 2,012 mboe/day | (0%) |
| Group Avg. Liquids Price | USD 33.6/bbl | USD 57.4/bbl | (41%) |
| Free Cash Flow (Q2) | (USD 1.85 billion) | (USD 0.83 billion) | N/A |
| Net Debt to Capital Employed | 29.3% | 19.9% (Q2 2019) | +9.4 pts |
Note: Net debt ratio increased to 29.3% (excluding lease liabilities) due to low commodity prices and tax payments related to 2019 earnings. Including IFRS 16 lease liabilities, the ratio was 34.7%.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues and other income dropped 56% to USD 7.6 billion, driven primarily by a 41% decrease in average liquids prices and a 61% decrease in average gas prices.
- Impairment Charges: Net operating income was negatively impacted by net impairment charges of USD 0.37 billion in Q2 2020 (USD 2.83 billion for the first half), primarily related to a gas processing plant in Norway, exploration assets, and reduced price assumptions.
- Trading Performance: The Marketing, Midstream & Processing (MMP) segment delivered a record high result, capturing significant value from crude oil and liquids trading in a contango market, partially offsetting upstream losses.
- Production Strategy: While total equity production remained flat year-over-year, Equinor deferred significant flexible gas production to capture higher expected future prices and complied with government-imposed oil production curtailments in Norway.
- Cost Reductions: The company is on track to reduce 2020 costs by approximately USD 700 million compared to original estimates. Upstream operating costs and unit production costs were significantly reduced.
Guidance, Outlook, and Risks
- Capital Expenditure Guidance: Organic capital expenditures are estimated at USD 8.5 billion for 2020, USD 10 billion for 2021, and an annual average of USD 12 billion for 2022-2023.
- Production Outlook: Scheduled maintenance is estimated to reduce equity production by approximately 30 mboe/day for the full year 2020. Long-term production growth (2019-2026) is expected to average 3% CAGR.
- Dividend: The Board declared a cash dividend of USD 0.09 per share for Q2 2020.
- Share Buyback: The remaining share buyback program has been suspended until further notice due to current market conditions.
- Risks and Contingencies:
- Covid-19 Impact: Uncertainty remains regarding the duration of the pandemic, its impact on global demand, and potential long-term industry investment reductions.
- Commodity Prices: Continued volatility in oil and gas prices poses a significant risk to financial performance and asset valuations.
- Legal/Tax: Ongoing disputes include a Canadian tax re-assessment proposal (max exposure USD 360 million) and price review arbitrations, though recent settlements have reduced exposure.
Key Facts for Investor Verification
- Non-GAAP Adjustments: Verify the reconciliation of IFRS Net Income (negative USD 0.25 billion) to Adjusted Earnings After Tax (positive USD 0.65 billion), noting the significant impact of temporary Norwegian tax changes and the exclusion of impairments.
- Debt Levels: Confirm the net debt to capital employed ratio of 29.3% and the issuance of USD 8.3 billion in bonds during Q2 2020 to strengthen liquidity.
- Impairment Assumptions: Review the commodity price assumptions used for impairment testing (Brent Blend USD 41/bbl for 2020) and the sensitivity of asset values to further price declines.
- Segment Reporting: Note the new separate reporting for E&P USA, which recorded a negative adjusted earnings of USD 0.34 billion in Q2 2020.
- Free Cash Flow: Acknowledge the negative free cash flow of USD 1.85 billion in Q2 2020, driven by low prices despite cost reductions and lower capital expenditures.