EQNR

Equinor ASA Form 6-K Summary: Second Quarter 2018

Business Context and Reporting Period

This Form 6-K, filed on July 26, 2018, reports the second quarter and first half 2018 results for Equinor ASA. This is the company's first financial report following its name change from Statoil ASA. Equinor is a global energy company engaged in the exploration, production, transportation, refining, and marketing of petroleum and petroleum-derived products. The reporting period covers the three and six months ended June 30, 2018.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue and Earnings: Adjusted earnings increased 43% in Q2 2018 compared to Q2 2017, driven primarily by higher liquids and gas prices and increased production. IFRS net income decreased 15% year-over-year due to a negative effect from changes in the unrealized fair value of derivatives (USD 0.5 billion) and a net impairment reversal in the current period versus a provision reversal in the prior period.
• Production: Total equity production rose 2% to 2,028 mboe/day, with growth primarily in the US onshore business. International production reached record highs.
• Costs: Underlying operating costs per barrel were slightly higher due to increased maintenance, new field start-ups, and quarter-specific items. Adjusted operating and administrative expenses increased by USD 303 million in Q2.
• Impairments: The company recorded a net impairment reversal of USD 0.3 billion in Q2 2018. This included a USD 0.6 billion reversal in E&P Norway and a USD 0.48 billion net impairment loss in E&P International (mainly North American unconventional assets).
• Cash Flow: Free cash flow for Q2 turned negative (USD -679 million) compared to positive USD 561 million in Q2 2017, largely due to business combination additions, higher tax payments, and capital expenditures.

Guidance, Outlook, and Risks

• Production Guidance: Equinor estimates 2018 production will be 1-2% above 2017 levels. Long-term production growth (2017-2020) is expected to be 3-4% CAGR from new projects.
• Capital Expenditure: Organic capital expenditures for 2018 are estimated at around USD 11 billion. Exploration activity is estimated at USD 1.5 billion.
• Maintenance: Scheduled maintenance is estimated to reduce quarterly production by approximately 80 mboe/day in Q3 2018.
• Dividends: The board declared a dividend of USD 0.23 per share for Q2 2018, maintaining the level from previous quarters.
• Transactions: The company closed the Roncador and Carcara transactions in Brazil and the North Platte transaction in the US. It also secured new exploration acreage in Brazil, the UK, and Norway.
• Risks: Significant risks include commodity price volatility, operational regularity, timing of new capacity, gas off-take, and uncertainty regarding the closing of announced transactions. Legal proceedings, including a dispute with COSL Offshore Management AS regarding a drilling rig contract, remain ongoing.

Investor Verification Checklist

• Adjusted vs. IFRS Reconciliation: Verify the impact of non-GAAP adjustments, specifically the USD 0.5 billion negative effect from unrealized derivatives and the USD 0.3 billion net impairment reversal, which significantly diverge Adjusted Earnings from IFRS Net Income.
• Free Cash Flow Volatility: Investigate the drivers behind the negative Q2 free cash flow (USD -679 million) despite strong operating cash flows, focusing on the timing of business combination payments and tax outflows.
• Impairment Assumptions: Review the long-term price assumptions used for impairment testing (Brent Blend USD 74/bbl for 2018) and the specific assets impaired in North America.
• Debt Metrics: Confirm the increase in the net debt to capital employed ratio to 27.2% and its trajectory relative to the company's target range.
• Legal Contingencies: Assess the potential financial impact of the COSL drilling rig dispute (approx. USD 200 million exposure) and the Norwegian tax authority dispute regarding R&D costs (approx. USD 500 million exposure).