{"id":14551,"date":"2023-05-27T06:30:16","date_gmt":"2023-05-27T10:30:16","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/equinors-free-cash-flow-generation-is-an-income-seekers-dream-nyseeqnr\/"},"modified":"2023-05-27T06:30:17","modified_gmt":"2023-05-27T10:30:17","slug":"equinors-free-cash-flow-generation-is-an-income-seekers-dream-nyseeqnr","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=14551","title":{"rendered":"Equinor\u2019s Free Cash Flow Generation Is An Income-Seekers Dream (NYSE:EQNR)"},"content":{"rendered":"
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Equinor ASA (NYSE:EQNR<\/span>) has become an engine of profitability in the last five years. They lead their peers in gross profitability, operating margins, and returns. In that period, they have generated over 93% of their market cap in free cash flows, providing enormous support for any future increase in capital distribution. The company trades at an attractive multiple, a gross profitability of 0.55 and a free cash flow of nearly 18%. The company belongs in the portfolio of any income-seeking, long-term investor.<\/span><\/p>\n

Underperforming on The Market<\/h2>\n

In the last five years, Equinor’s share price has risen by a very tepid 4.26%, compared to a (market-cap weighted) peer group average of over 16%, nearly 57% for the S&P 500 and more than 20% for the Xtrackers MSCI World Energy ETF 1C (XDW0), which tracks the MSCI World Energy Index and will serve as a proxy for the energy industry. However, thanks to the firm’s dividend issuance, Equinor’s total shareholder return (TSR) was 33.5%, compared to a peer group average of 48.08%. Xtrackers MSCI World Energy ETF 1C (XDW0) Equinor’s peer group includes BP p.l.c. (<\/span>BP), Chevron Corp.(<\/span>CVX), ConocoPhillips Co. (<\/span>COP), Eni SpA (<\/span>E), Exxon Mobil Corp. (<\/span>XOM), Repsol S.A. (<\/span>OTCQX:REPYY), Shell plc (<\/span>SHEL), and TotalEnergies SE (<\/span>TTE).<\/span><\/p>\n

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Source: Morningstar<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Equinor’s Profitability is on The Rise<\/h2>\n

Since 2016, when shareholders voted to tie executive compensation to return on average capital employed (ROACE) and TSR, both relative to the company’s peer group. Both these modifiers are equally-weighted. The effect of this is to tie shareholder interests for capital allocation excellence to executive compensation.<\/p>\n

This has resulted in the firm’s profitability improving significantly, from a ROACE of -4.7% in 2016 to 55.2% in 2022. This performance improvement has resulted in the company having an above average relative TSR ranking among its peers, and its relative ROACE is in the first quartile among those peers. The firm aims to have an average ROACE of 14% for the 2022 to 2030 period. In the last five years, Equinor’s return on invested capital (ROIC) has risen from 18.8% in 2018 to 64.1% in 2022. The peer group average ROIC is 27.09%.<\/p>\n

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Source: Equinor ASA Filings and Author Calculations<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

At a more granular level, we can see evidence of this improving profitability. Over the last years, Equinor’s gross profitability has risen from 0.28 in 2018 to 0.55 in 2022, which is far above the 0.33 threshold of attractiveness as found by Robert Novy-Marx. Its peer group average gross profitability was 0.3 in 2022.<\/p>\n

The company’s operating margin has risen from 25.3% in 2018, to 52.26% in 2022. In 1Q23, its operating margin was 81.49%, compared to 91.76% in 1Q22 and 85.99% in 4Q22. The peer group average operating margin is 22.36%.<\/p>\n

Equinor’s net income rose from $7.54 billion in 2018 to $28.75 billion in 2022, compounding at 30.69% a year. The peer group average net income is $40 billion. The company has been an earnings giant, with 11% of the earnings in its peer group.<\/p>\n

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\"Source:<\/span><\/picture>
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Source: Company Filings<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Overall, Equinor’s profitability is greater than that of its peers, with the firm enjoying superior gross profitability, ROIC, and operating margin, compared to its peers.<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n<\/colgroup>\n\n\n\n\n\n\n\n\n\n\n\n
\n

Company<\/p>\n<\/td>\n

\n

Ticker<\/p>\n<\/td>\n

\n

Gross Profitability<\/p>\n<\/td>\n

\n

ROIC<\/p>\n<\/td>\n

\n

Operating Margin<\/p>\n<\/td>\n

\n

Net Income (in billions)<\/p>\n<\/td>\n<\/tr>\n

\n

Equinor ASA<\/p>\n<\/td>\n

\n

EQNR<\/p>\n<\/td>\n

\n

0.55<\/p>\n<\/td>\n

\n

64.10%<\/p>\n<\/td>\n

\n

52.26%<\/p>\n<\/td>\n

\n

$28.75<\/p>\n<\/td>\n<\/tr>\n

\n

BP plc<\/p>\n<\/td>\n

\n

BP<\/p>\n<\/td>\n

\n

0.27<\/p>\n<\/td>\n

\n

21.70%<\/p>\n<\/td>\n

\n

18.68%<\/p>\n<\/td>\n

\n

$26.12<\/p>\n<\/td>\n<\/tr>\n

\n

Chevron Corp.<\/p>\n<\/td>\n

\n

CVX<\/p>\n<\/td>\n

\n

0.28<\/p>\n<\/td>\n

\n

22.30%<\/p>\n<\/td>\n

\n

20.87%<\/p>\n<\/td>\n

\n

$35.78<\/p>\n<\/td>\n<\/tr>\n

\n

ConocoPhillips Co.<\/p>\n<\/td>\n

\n

COP<\/p>\n<\/td>\n

\n

0.40<\/p>\n<\/td>\n

\n

28.40%<\/p>\n<\/td>\n

\n

32.86%<\/p>\n<\/td>\n

\n

$15.84<\/p>\n<\/td>\n<\/tr>\n

\n

Eni SpA<\/p>\n<\/td>\n

\n

E<\/p>\n<\/td>\n

\n

0.20<\/p>\n<\/td>\n

\n

19.50%<\/p>\n<\/td>\n

\n

13.10%<\/p>\n<\/td>\n

\n

$14.77<\/p>\n<\/td>\n<\/tr>\n

\n

Exxon Mobil Corp.<\/p>\n<\/td>\n

\n

XOM<\/p>\n<\/td>\n

\n

0.31<\/p>\n<\/td>\n

\n

27.10%<\/p>\n<\/td>\n

\n

21.18%<\/p>\n<\/td>\n

\n

$61.69<\/p>\n<\/td>\n<\/tr>\n

\n

Repsol S.A.<\/p>\n<\/td>\n

\n

REPYY<\/p>\n<\/td>\n

\n

0.27<\/p>\n<\/td>\n

\n

2.01%<\/p>\n<\/td>\n

\n

14.03%<\/p>\n<\/td>\n

\n

$3.97<\/p>\n<\/td>\n<\/tr>\n

\n

Shell plc<\/p>\n<\/td>\n

\n

SHEL<\/p>\n<\/td>\n

\n

0.19<\/p>\n<\/td>\n

\n

19.90%<\/p>\n<\/td>\n

\n

17.61%<\/p>\n<\/td>\n

\n

$42.31<\/p>\n<\/td>\n<\/tr>\n

\n

TotalEnergies SE<\/p>\n<\/td>\n

\n

TTE<\/p>\n<\/td>\n

\n

0.31<\/p>\n<\/td>\n

\n

33.80%<\/p>\n<\/td>\n

\n

16.01%<\/p>\n<\/td>\n

\n

$31.03<\/p>\n<\/td>\n<\/tr>\n

\n

Peer Group Average<\/p>\n<\/td>\n

 <\/td>\n\n

0.30<\/p>\n<\/td>\n

\n

27.09%<\/p>\n<\/td>\n

\n

22.36%<\/p>\n<\/td>\n

\n

$40.00<\/p>\n<\/td>\n<\/tr>\n<\/table>\n

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