Equinor - Q3 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Equinor Q3 2023 Analyst call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For Operator assistance throughout the call, please press star zero, and finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Bård Glad Pedersen, Senior Vice President of Investor Relations, to begin the conference. Bård, over to you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Operator, and good morning to everybody on this call. As the Operator said, my name is Bård Glad Pedersen, and I'm heading up Investor Relations in Equinor. I'm here together with our CFO, Torgrim Reitan. He will take us through the results before we start the Q&A session, and we will try to keep this within one hour in total. So with that, I give the word to you, Torgrim.

Torgrim Reitan (CFO and VP)

So thank you, Bård, and good morning, everyone, and thank you for joining us. Today, we deliver strong results in a quarter with lower prices than the extraordinary levels we saw last year. We have strong adjusted earnings of $8 billion and $2.7 billion after tax. Our net operating income came in at $7.5 billion, and net income was $2.5 billion. Year to date, we have a strong cash flow from operations after tax of $17 billion. This corresponds well to what we said at our Capital Markets Day in February, when we expected to deliver on average $20 billion annually all the way to 2030. We are on track with our delivery this year. European gas prices are significantly lower than last year.

Storages are now, for all practical purposes, full, and this is as expected. However, the gas market is tight, and it is still very sensitive. We have seen price spikes related to possible strikes in Australia, the terrorist attack on Israel, and the situation with the Baltic Pipeline. This winter, prices will again depend on weather, gas demand recovery in Europe, competition for LNG from Asia, and any supply disruptions. We believe volatility will continue into the winter and for the coming years. During the quarter, we have seen strengthening liquids prices, and we captured these higher prices through increased liquids production across our portfolio. Our NCS gas production, however, is down due to planned maintenance, but also due to unplanned, extended turnarounds, and I will come back to production later in my presentation.

We had strong liquid sales and trading that drove our MMP results above the increased guidance for the quarter. This fall, we have passed significant milestones, and I'm proud of the hard work and collaboration of our colleagues who make this happen. In early October, we saw first power at Dogger Bank, the world's largest offshore wind farm. When fully complete, its 3.6 GW capacity with 277 turbines will produce enough energy to power the equivalent of 6 million British homes. This is a large and profitable project, with inflation-adjusted offtake contracts that support value creation. So we see progress, but the offshore wind industry is also experiencing challenges with inflation, higher interest rates, and supply chain bottlenecks. Our petition to New York for price adjustment of projects on the U.S. East Coast was denied, together with similar petitions from many other developers.

Contrary to in the UK and Poland, offtake contracts here or in the U.S. are not inflation adjusted. So based on this, we have taken an impairment on the U.S. East Coast projects. We are now assessing the impact of New York's decision, and we are working closely with the state as they further develop their ten-point action plan to expand and support the renewable industry. Last night, New York advanced an expedited renewable energy procurement process, as they call it, as part of the ten-point plan. We welcome this, but it is important for me to say that our projects, they must be financially robust to proceed. More broadly, we remain confident that offshore wind will be important for the energy transition, and that we can be a leader in this industry. Our strategy to profitably grow in renewables remains firm.

We have a strong portfolio within offshore wind, but also within onshore renewables, where we have accessed attractive opportunities when prices for offshore wind have been too high... For example, our bolt-on acquisitions of BeGreen in Denmark, Wento in Poland, and Rio Energy in Brazil. Energy security remains very important. We have mature projects with high value and low emissions, and just last week, we brought Breidablikk on stream, on cost and four months ahead of schedule. At plateau, Breidablikk is expected to send 55,000-60,000 barrels per day to the market. This is a subsea tieback to the Grane platform in the North Sea, and it is a good example of our use of existing infrastructure, generating production with low cost and low emissions. The field is expected to be paid off in less than two years.

We also received PDO approval for our Snøhvit Future projects, which will electrify our Hammerfest LNG plant and significantly reduce emissions by 850,000 tons per year. Last but not least, in the quarter, we reached a final investment decision and got approval for Rosebank in the U.K., a significant project for our international portfolio. We continue with strong capital distribution in line with what we communicated at our capital markets update. For the quarter, the board approved an ordinary cash dividend of $0.30 per share, as well as continuing the extraordinary dividend of $0.60 per share, for a total of $0.90 in cash dividend. We continue our share buyback program. The fourth and final tranche will be $1.67 billion, in line with the program for 2023 of total $6 billion.

For this year, we are delivering a total capital distribution of around $17 billion. Then, turning to safety. In August, there was a fatality of a crew member who fell overboard on an LPG tanker in Malaysia. The vessel was in operation for Equinor, and the tragic incident is affecting everyone involved. So this is a strong reminder that even with a positive safety trend, we must keep focusing on safety in all our activities. Safety will remain our top priority. In the quarter, we produced 2,007,000 barrels of oil and gas per day. And as you see on the slide, this is substantially more oil, but less gas than in the third quarter last year.

Our liquids production increased 12% compared to this quarter last year, driven by Johan Sverdrup in Norway, with increased production capacity, Peregrino in Brazil, the partner-operated Vito field in the U.S. Gulf of Mexico, and the addition of Buzzard in the U.K.. Our NCS gas production, however, is down 16% this quarter, driven by planned maintenance, but also unplanned extended turnarounds on Troll A and Nyhamna gas processing plant. They are all back in normal production now, but the impact for the quarter was around 60,000 barrels per day, and we had a similar impact last quarter of around 70,000 barrels per day. Therefore, we have adjusted our guidance for production growth from around 3% to around 1.5% in 2023. Power production for the quarter ended at 883 GWh.

373 of this is from our renewable assets, slightly higher than last year, driven by onshore renewables in Poland and Hywind Tampen being fully operational. Gas to power production was 510 GWh from our Triton power plant, which is lower than in second quarter. So let's now turn to our financial results. The prices for both oil and gas are lower than last year. Our realized gas price is down around 75%, 75%, and even more in the U.S., actually. Adjusted earnings in EMP Norway totaled $6.1 billion before tax, driven primarily by strong liquids production. Our EMP International delivered $809 million, and our U.S. business posted adjusted earnings of $343 million. Both segments driven by higher liquid production and high realized liquids prices.

Adjusted earnings after tax from our combined international segments was more than $900 million. In the marketing and midstream segment, our adjusted earnings came in above our increased guidance with $876 million. This was driven by strong liquid sales and trading due to our ability to capture opportunities in inefficient markets... and our strong performance from our LNG and shipping activities. Our renewables business post negative results as we continue to invest in new projects and business development. We see operating costs coming down with 2% from second quarter, from last quarter, but costs have increased over several quarters, so we will continue with strong cost management and capital discipline. We have net impairments in the quarter of $971 million.

This includes impairments for a field, excuse me, for a field in the North Sea and the Mongstad Refinery, and the reversal for a field in the Gulf of Mexico. The impairment of our U.S. East Coast offshore wind project is $300 million. Here, we now have a remaining book value totaling around $300 million. $100 million in the projects and around $200 million related to real estate in New York and cables. Our total exposure also includes additional commitments related to infrastructure and contracts with suppliers. But you should also remember, we entered these U.S., excuse me, these U.S. East Coast projects early, and we paid less than $200 million on a 100% basis. We later divested 50%, and we booked a gain of $1 billion.

In the quarter, cash flow from operations was $11.3 billion and $7.6 billion after tax. We have paid one tax installment of around $3.7 billion and capital distribution of $3.1 billion. Next quarter, we are paying two NCS tax installments of around $3.75 billion each, and one additional tax payment of $1 billion due to increased commodity prices. After tax, capital distribution, and capital expenditures, our net cash flow was positive $1.5 billion. For the full year, we expect to have negative net cash flow, as discussed at CMU, and with higher tax payments next quarter, we expect negative net cash flow in the fourth quarter. So far, we have -$5 billion for the year, and this is in line with our expectation.

We have a robust financial position with cash, cash equivalents, and financial investments of $40.2 billion, and a net debt to capital employed ratio of -22.9%. This includes tax normalization to even out taxes across the third and fourth quarter, and without that, the net debt ratio would have been around -30%. So let us conclude with our guiding. As stated last quarter, we saw a higher downside risk to our production guidance. Due to the unplanned production losses in the third quarter, we adjust our guidance to around 1.5% production growth in 2023. Organic CapEx is, so far this year, $7.2 billion. We maintain our guiding of $10 billion-$11 billion for the year, and we expect to be in the lower end of this range.

We will, as usual, revert to longer-term CapEx guidance at our capital markets update in February. So with that, I will hand it over back to you, Bård, and I do look forward to your questions. So thank you very much.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Torgrim, and we are then ready to start the Q&A session. So Operator, if you can remind of the instructions for that.

Operator (participant)

Thank you both, and at this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. In the interest of time, would you request to please limit your questions to one and one follow-up? Again, if you would like to enter in the queue to ask a question, press star one, and your first question comes from the line of Biraj Borkhataria from Royal Bank of Canada. Your line is open.

Biraj Borkhataria (Managing Director, Co-Head of European Energy Research)

Hi, Bård, Torgrim. Thanks for taking my questions. I wanted to circle back on the, on the US wind position. So you've taken the impairment today. Last night, there was some news from the New York State around a, a request for consultation. So it seems like they're making an effort to expedite some of these things and, and push these things forward. Where does this leave, you know, Equinor and, and Empire Wind? You obviously took the decision to impair because you couldn't renegotiate the PPA, but I'm just wondering, you know, what the next steps are from here. And then the second one is on Norwegian output. You know, arguably, you've had more than your fair share of unplanned outages this year.

When you do your sort of audits and analysis, is there a common theme here in terms of the issues, or are all of these project-specific? How can investors get some comfort around your ability to produce reliably, you know, going forward, given the issues this year? Thank you.

Torgrim Reitan (CFO and VP)

Okay. Thank you, thank you very much, Biraj. So on your first question on the U.S. wind. Yes. So I mean, the petition towards the state, it was rejected. And that was the basis for the impairments that we have done. And, you know, right after, you know, we received that rejection, the state came out with a 10-point action plan for, you know, opportunities to rebid, you know, on our contracts. So, and then, as you say, last night, they came out with sort of, you know, how they want to run this process, where they would like feedback from us next week on process, and then we'll see where that leads us.

So first of all, you know, we clearly welcome that they push forward the action plan quickly and what they are doing now. I do find that as a signal of, you know, commitment and a willingness to fast forward a process. For us, it's too early to conclude. Too early to conclude. But what I want to say is that for us to move forward with these projects, we need to see, you know, profitability that is sort of reflecting the risk at hand. So we will continue to work closely with the state as the process unfolds. And we will be more than happy to share more details when we know more, naturally.

On your second questions on the Norwegian output. So let me first, you know, go through, you know, the different, different sort of incidents or things that happened. We had Melkøya during the summer with a gas leakage, you know, and an incident that sort of halted production from Snøhvit during summer and also into the third quarter. We had Nyhamna, which is a, you know, a processing plant operated by Shell, where the turnaround was prolonged, and that sort of led to that we need to hold back production from Aasta Hansteen, which we operate, but also Ormen Lange, operated by Shell, needed to hold back production due to the prolonged turnaround Nyhamna. And the third one is on Troll A, which was due to a turnaround.

But as we were, excuse me, but as we were starting that up, we discovered some welding issues on some of the work. So we needed to revisit that, and that sort of delayed the startup of Troll with 13 days as such. My point is that these three events are not interconnected in any way. They are separate incidents. And, you know, all of these are plants on all of, you know, high integrity and high quality. And, and, and it's not going to—I mean, we are confident that the, the, these will have no long-term impact as such. In general terms, I would say that the, the standard and quality of our facilities is, is, is, is very high, and, and demonstrated by high, high production efficiency.

I think on, on, when we talk about production output, next year and, and following year, let me give you a couple of, couple of data points. You have seen Breidablikk coming on stream recently, so that is sort of adding production next year. Also, Vito in the Gulf of Mexico. Then Johan Castberg is sort of the big new startup next year. That is planned to come towards the end of 2024, so it will have a limited impact on the full year, but in the last quarter, we expect that to have a good impact. We are also, you know, a startup of Kristin South, phase one, with some volumes as such. But, but please remember, there is, there is an underlying decline, you know, in the portfolio that we, we need to be aware of as well.

And then in 2025, we have Bacalhau phase one as a significant startup. And also there's a lineup of NCS assets that are coming with a good production output as such. So I mean, it's a solid portfolio with profitable assets coming on board. And what we have seen this year, we don't see that having a long-term impact on the ability to produce. So thanks, Biraj.

Biraj Borkhataria (Managing Director, Co-Head of European Energy Research)

Okay. Thank you very much.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Torgrim, and thank you, Biraj, for your question. The next question will be Giacomo Romeo from Jefferies. Please, Giacomo.

Giacomo Romeo (Energy Analyst)

Yes, thank you. First question I have is on Dogger Bank A. You announced first power in October. However, we noticed that only 4 turbines have been installed out of the 94 since the end of August. Just wondering, what, when do you expect to reach full power capacity? Have some clarity there, if possible. Thank you. Just second question is, you had a good contribution in MMP from crude products and liquids, and again, this quarter. Well, obviously, we normally talk about your gas and power trading business, but crude has and products have been, has done very well and pretty decently. Is anything has changed here in the way you sort of look at the optimization and trade around liquids?

Torgrim Reitan (CFO and VP)

Some color, it would be great. Thank you. Okay, thank you very much, Giacomo. So first on Dogger Bank. Yeah, first power, very glad to see that. So this is sort of in being installed. There are many turbines, and we expect sort of full power next year in third quarter as search for Dogger Bank A. We're really looking forward to that. And as you know, Dogger Bank projects are looking, you know, good from a profitability perspective. In the U.K., the contract for differences are adjusted for inflation, and with sort of the inflation seen in the U.K. over the last years, that has contributed well to a very attractive assets. On your second question on MMP.

Yeah, so I mean, MMP continues to deliver strongly, and this quarter above the increased guidance that we gave at the Capital Markets Day. And I also think it's worth noting that natural gas, which was sort of the big contributor last year, is still contributing solidly, but they are not the one doing sort of the heavy lifting in this result. That is the liquids trading, as such. So this comes out of arbitrage opportunities resulting from that, you know, global trading flows are changing due to Russian oil being delivered into Asia. So we see that creates opportunities when you have, you know, a good and large shipping fleet, combined with the qualities that we produce around the globe.

So I'm very glad to see that we have been able to really take out the value opportunities that arise in a changing oil market as such. So going forward, you should. It's very hard to predict naturally who is going to be the biggest contributor, you know, from quarter to quarter. But as long as there are arbitrage opportunities within the oil market, we'll take them. And the gas results, they will typically be driven by volatility in the market and arbitrage opportunities between the various geographical markets as well. Those have been, you know, fairly muted in the third quarter, but they have been very, very large earlier on. So when that changes, we are ready to take and then create more value from that part.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, and thank you, Giacomo, for your question. The next one is, Oswald Clint from Bernstein. Oswald, please go ahead.

Oswald Clint (Senior Research Analyst, European Oil & Gas)

Yes, thank you. Good morning. Yeah, I wanted to also ask about MMP and the $400 million-$800 million a quarter guidance that was increased at the start of the year. Obviously, beating it this quarter is normally less exciting for natural gas. You just discussed the liquid side, but you know, I remember the chart back in February had quite a lot more upside from optionality and optimization. That fuzzy blue bar was significantly higher. So, I mean, the question is, as we roll into next year, is there any confidence building, I guess, internally that you can probably do more than this guidance, or at least more than the lower end of that guidance range? That's the first one. And then secondly, yeah, I had a follow-up.

I wanted to know if you could tell us more about the Linnorm field in offshore NCS. Seems like it's a sizable one, and it may be moving forward. So just your, you know, latest discussions in the consortium around the concept and whether we could see this moving forward, please. Thank you.

Torgrim Reitan (CFO and VP)

Good. Thanks, Oswald. Yeah. So, MMP continues to deliver strongly. And I think it's fair to say that, you know, I mean, we have confidence in that we will be able to continue to deliver strong results from that segment. Going into next year, clearly volatility will be important to monitor. And we have seen in particular, with a lot of volatility in the market, we can make our balance sheet available to take risk and make significant profit. And we saw that in 2022 and from Danske Commodities and from the gas trading as well. So yes, we are confident that we will be able to deliver good value.

So on Lindorm, you know, it is not operated by ourselves. This is operated by Shell, so it will be natural to confer with them on the specifics. But clearly, this is, you know, it is a gas and condensate field. And, you know, it is an asset that we like and support, and we stand fully behind Shell in sort of the way forward on that asset.

Oswald Clint (Senior Research Analyst, European Oil & Gas)

Okay. Okay, very good. Thank you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you. And the next question is, Teodor Sveen-Nilsen from SpareBank 1 Markets. Teodor?

Teodor Sveen-Nilsen (Equity Research Analyst, Oil & Gas)

Hello there. Thanks for taking my questions, and congrats on strong results. Two questions. The first on Sverdrup. The field is currently producing very well. I just wonder, should we expect the current level-

... also next year, also noticed also that the liftings or loadings has declined substantially over the past few weeks. Should we read anything out of that when it comes to fourth quarter production from Sverdrup? Second question is on NCS gas, and of course, there has been a lot of maintenance there the past few months, which has reduced production. Just wondering, could you discuss whether we should, should relate this to the very high production last year, that some of the maintenance was skipped, and that is the reason why we see low, low production this year? Or is that totally unrelated from last year's strong gas production? Thanks.

Torgrim Reitan (CFO and VP)

Okay, thanks, Teodor. So on Johan Sverdrup, you know, very glad to see how Johan Sverdrup is performing with high production efficiency. And we will continue to produce at high levels. But of course, you know, with the increased capacity, we will also sort of come off plateau at some point in time. It is expected to be, you know, or coming off plateau in 2024 and 2025 as such. But as you know, we are actively working with the reservoir and getting to understand it better and optimizing it on a daily basis.

We are also working on a Johan Sverdrup phase lll, which will be a subsea development, with two templates, typically, and 8 wells that we will try to tie in or we will tie into the platform. The purpose of that development is, of course, to maintain, you know, a high level of production on Johan Sverdrup, you know, continuously. On sort of lifting in, you know, and not you shouldn't put, you know, much to that. I mean, production is stable last weeks on Johan Sverdrup. Excuse me.

On your second question, Theodore, on the gas production and whether the production issues we have seen this year is related to last year's high production, and the answer to that is that is unrelated. So there's no sort of link back to that.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you,

Teodor Sveen-Nilsen (Equity Research Analyst, Oil & Gas)

Okay, thank you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Theodore. The next question is, Alastair Syme from Citi. So please go ahead, Alastair.

Alastair Syme (Equity Research Analyst)

Yeah, thanks, Bård. Torgrim, can you talk about just back on the renewables, about your supply chain commitments? I mean, I think I remember you saying that on Empire Wind One, there was already quite a lot of contracting in place around turbine suppliers and maybe a boat. But there doesn't seem to be much remaining book value. So I was just wondering how we square that up or, you know, are we seeing break clauses or something in there? And then just secondly, you know, I'm interested to hear what you're seeing in the recent gas demand data in recent weeks. You know, we can all see the aggregate data, but I'm sure you've got a lot more color on what different customer groups are doing, so I'd be really interested to hear that. Thank you.

Torgrim Reitan (CFO and VP)

Okay. Thanks. Thanks, Alastair. So on renewables and supply chain commitment. Excuse me, on renewables and supply chain commitment. So let me talk to the situation in the U.S. So the impairment that we have done is $300 million. As I said, we have now still $100 million in book value in sort of the two assets. And in addition to that, we have $200 million booked related to real estate in New York and some equipment, which is, you know, in reality, cables. Beyond that, we have commitments, you know, that is not sort of booked, but we still have them.

They are mainly related to a lease arrangement to a property in Brooklyn, as such, which is a lease that and a property that can be used for other purposes. And we have also contracts related to ships and turbines, which are typically, you know, can be used other places in the portfolio as well. But, I mean, it's too early to give specific numbers on those, but that is sort of the exposure as such. So in addition to that, we have a, you know, a termination fee to the current offtake contract, which is at $16 million as such. So I think that gives sort of the totality of the exposure at hand.

And again, sort of we are welcoming the process that the New York State now is starting, and we will work closely with them to see what sort of opportunities that can arise out of that. So thanks, Alastair. On the gas demand. Yeah. I mean, storages are, for practical purposes, full for the time being, but clearly we see a very tight market and a rather nervous market, where sort of small, not small, but where happenings have typically a significant impact on prices. We have seen it on the terrorist attack on Israel. We have seen it on the pipeline, the Baltic Pipeline, and we see quite a bit of volatility in the prompt, particularly.

So I think we just need to be prepared for you know, a rather volatile and tight situation through this winter. Weather will, of course, always be a significant thing, and as well, demand from Asia. Demand is sort of, I mean, demand from industrial customers are not really coming back to pre-war levels, but it is still sort of you know, healthy demand also from the industrial segments as I see it.

Alastair Syme (Equity Research Analyst)

Okay, thanks for the call, Torgrim.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you. Next one is Henri Patricot from UBS. So Henri, please.

Henri Patricot (Equity Research Analyst)

Yes, hello. Thank you, and Torgrim, thank you for the presentation. Two questions, please. The first one I want to ask about, M&A. We've seen quite a bit of consolidation in U.S. upstream lately, and we've seen challenges in renewables. So I was wondering, whether these recent developments are changing in a way your potential appetite for M&A, and then your focus in terms of, where you're likely to make acquisitions in the future, in terms of region, but also between upstream and renewables. And then secondly, I wanted to ask about the CapEx. So you mentioned that you see CapEx for this year more in the lower end of the guidance range.

Can you expand on what's driving CapEx toward the lower end for this year? And then whether you see risk a bit to the downside as well for the next few years, or if there is just inflation pressure and risk maybe more to the upside. Thank you.

Torgrim Reitan (CFO and VP)

Yeah. Thanks, Henri. So first on M&A. Yeah, so I mean, the two large acquisitions in the U.S. clearly, you know, send some signals to the market. One, that is that sort of oil and gas, you know, is, you know, to be attractive for a long period as such. And also, I think there is an element of, you know, energy security importance as well, that is sort of driving that. So, I don't think it's unlikely that, you know, we will see more transactions of also bigger size going forward, but this time it is a little bit different than last time around. Last time around, it was driven by a low price environment and cost synergies and efficiency. This is not a driver this time around.

They are different drivers. So I think what this will lead to is more uncertain this time around. So we will have to follow that closely. You know, but you know, we have our portfolio as such. I mean, it is a strong portfolio within oil and gas already. I mean, we are growing towards 2026. And we will keep the same level all the way, all the way to 2030, and we have an average break even of $35 per barrel, and internal rate of return on 30% of these projects. So there's a good investment program going forward. When that is said, I mean, we are using M&A actively as a tool. And you have seen it seen it you know, last year.

We have made an acquisition into oil and gas, the Suncor portfolio in the U.K. And you have seen several acquisitions within the renewable space, as well, you know, Rio Energy, BeGreen in Denmark. So we will continue to use M&A actively to focus and deepen our oil and gas activities and to support, you know, the energy transition and building a new portfolio. So I mean, we will do that. And then, you know, it is very important for me to say that capital discipline is front and center when doing M&A. Timing is of essence, and quality is of essence. Your second question on CapEx. So the reason for that, we will come towards the lower end of the guiding this year is phasing of projects.

So these are the spending that typically will move on to later years. When it comes to from 2024 and onwards, we are in the midst of our planning season. We are prioritizing, you know, among a set of very attractive investment opportunities. There is competition for funds, so we are in the midst of doing that. I think it's fair to say that we will continue to demonstrate capital discipline, and then, of course, we note that there is inflationary pressure in the portfolio, which is particularly linked to the non-sanctioned part of the portfolio. But, you know, we are managing this well, and we will come back to this on the Capital Markets Day in February.

Henri Patricot (Equity Research Analyst)

Thank you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you. Next question is Kim Fustier from HSBC. Kim, please go ahead.

Kim Fustier (Equity Research Analyst)

Oh, hi, thanks for taking my question. My first question is on low carbon solutions. I think you recently bought a 25% stake in Chevron's Bayou Bend CCS project on the U.S. Gulf Coast. Could you just talk about the development timeline and about what Equinor is bringing to the consortium? And secondly, it seems that there's some controversy from environmental groups in Norway with respect to new NCS developments, including Breidablikk and Yggdrasil. Could you comment on the operating environment in Norway? Could things maybe become more difficult going forward if these environmental groups gain more traction? Thank you.

Torgrim Reitan (CFO and VP)

Okay. Thank you, Kim. So you're right, we made an acquisition into Bayou Bend in Texas. That's a carbon storage CCS project and storage. Chevron is Operator, and we now sit on 25% on that on that lease. So this is you know a reservoir of very high quality and and with a you know potentially significant capacity to to store CO2. I mean, benefiting from the IRA regulation. So so we are you know enthusiastic about that opportunity. We typically bring quite a bit of experience when it comes to reservoir management and understanding of capacities and and and you know how to how to do this.

We have a long, long experience working together with Chevron in the Gulf of Mexico, also particularly working on the reservoir topics together with them. So we see that as a clearly... And then, you know, we shouldn't forget that, you know, we have, you know, more than 30 years of experience on CCS from the Norwegian Continental Shelf through our experience on Sleipner and also on some other fields, as well. On your second question on the sentiment in Norway for future development. Yeah, it is, you know, clearly there is opposition in Norway as well as in other places.

I would say there is a politically a very strong and good consensus, you know, and collaboration across political landscape to support the development of the Norwegian Continental Shelf. So I feel confident that this is an area where investing into oil and gas is giving a predictable and a stable environment as such. And then there will always be, you know, institutions and voices that are against what we do, and then we need to treat that with respect and openness, and clearly, we are in dialogue with everyone as such. So I don't find it to be any particular concerns in Norway compared to other places.

Kim Fustier (Equity Research Analyst)

Thank you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you. Next question is, Peter Low from Redburn. Peter, please go ahead.

Peter Low (Partner and Co-Head of Energy Research)

Thanks. It's a question on the balance sheet. Remains firmly net cash. You've talked in the past about wanting to return to that 15%-30% leverage ratio, and perhaps distributions being something that will kind of get you there. As we begin to think about 2024, shareholder distributions, can you give us any insight on kind of how quickly you'd like to get back to that level of range? And then the second one, which is very quickly, you mentioned the impairment you've taken on the NCS, due to, I think, an asset having kind of a low reserve estimate than previously, and then also a reversal of an impairment in the U.S. Are you able to name those assets and say what led to that change in assessment? Thanks.

Torgrim Reitan (CFO and VP)

Okay. Thanks, Peter. So, on your first question on the balance sheet and capital distribution going forward, yeah, you know, we are in a situation where, where we have a negative net debt of -22.9%, and we have a sort of a long-term guiding, which is sort of 15%-30% net debt, which is sort of mathematically what is solidly supporting a strong single A category credit rating on a standalone basis. We have, you know, a higher rating than that currently. So that's. You should read that as a sort of a range that we will sort of find as a more optimal capital structure of the company. And, you know, from time to time, we are above, and then, you know, also below, as such.

So that is sort of, you know, a long-term, long-term aspiration. We are... And I, I have said earlier that, that capital distribution is, you know, something that we are using currently to distribute, you know, cash, that we have on the balance sheet, to, to drive a more efficient capital structure of the company. And, and I've also said that we will continue to use, that as one of our tools to achieve, achieve that going forward. It is, of course, nothing that I can go into any details on in this call, but clearly, we will come back to that in our fourth quarter call and capital markets, update. On your next or your second question, Peter, NCS impairment. Yes, that is Martin Linge.

It is an asset that we took over from Total many years ago, and we have had issues with that asset repeatedly as well. So this time around, it is related to the reservoir, where we see that the production is postponed to come towards later in the production life of the field, meaning that the discounted value of the asset is going down. So that's Martin Linge. This is not a broader concern at all on the NCS. This is isolated to this asset. Yeah, and then we talked about the reversal in the US that is related to an asset in Gulf of Mexico, $290 million.

Thanks, Peter.

Peter Low (Partner and Co-Head of Energy Research)

Thank you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Peter. And, Anders Rosenlund from SEB is the next question. So Anders, please go ahead.

Anders Rosenlund (Equity Research Analyst)

Thank you. It feels like repeating almost the first or the previous question, but I'd like to revert to the overcapitalization situation, and the path you are pursuing is not remedying the situation. So what's the natural consequence of that? Is that more aggressive dividends and buybacks, or are you happy with the development that you're seeing?

Torgrim Reitan (CFO and VP)

Yeah. So, yeah, Anders, thanks. Yeah, you know, at the outset, I think it's important for me to reflect upon, you know, the volatility and uncertainty that we are facing as an industry. In 2020, we had the weakest result in history for Equinor. In 2022, we had the highest and strongest results. So within two years, we went to worst to best as such, and that is the volatility and exposure that we need to manage, meaning that we will have to, and we shall run with a solid balance sheet to be able to weather any storms that is ahead of us. And then we are, of course, in an extraordinary situation now, where capital distribution gives room for additional capital distribution, as you have seen this year.

Then we said again, you know, we will continue to use capital distribution as one of the tools to bring this back to a more efficient capital structure. So yeah. So, but, we'll speak much more to this in our Capital Markets Day in February. So looking forward to see you then.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Anders. Next one is Michele Della Vigna from Goldman Sachs. So, Michele, please.

Michele Della Vigna (Managing Director, Head of Natural Resources Research)

Thank you very much, and congratulations again on the strong delivery this quarter. My question really is about the security of your Norwegian pipeline infrastructure. We've seen issues in Sweden, in Finland, Estonia. I was just wondering, over the last couple of years, what has changed in terms of the focus on guaranteeing the security of those pipelines, and that would make you comfortable that such an issue would not take place on the Norwegian Continental Shelf? Thank you.

Torgrim Reitan (CFO and VP)

Thank you, Michele. It's, it's a very, very important question, so thank you very much. Clearly, this is, you know, front and center for us, you know, these days. After the terrible, you know, attack on Ukraine, we are seen as the most important energy company in Europe, and clearly, we will do our utmost to serve Europe with natural gas and other energy sources as well. We have increased the security levels on all our installations and infrastructure on the shelf, and we have taken, you know, many measures. As you would understand, we have a very good dialogue with the security institutions and safety and also international organizations so to understand.

We have a lot of support from those institutions and also support from military organizations as well. What we have done over the last year is that we have mapped all our pipelines. We have screened them with sort of underwater equipment to all of them, and we are monitoring closely the situation. This is front and center and top, top attention to the company, and we are doing everything we can together with Norwegian and international authorities to safeguard energy deliveries to Europe.

Michele Della Vigna (Managing Director, Head of Natural Resources Research)

Thank you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Michele. Next is Henry Tarr from Berenberg. Henri, please.

Henry Tarr (Director, Co-Head of Energy and Environment Research)

Thanks very much for taking my questions. Two, please. One is just on the, to come back again to the offshore wind and the RFP process, et cetera. I guess, as you've said, you're looking at, you know, the opportunities going forwards, and that you need an economic return on those. Would it be right then to look at the request you put in, for the uplift and think that, you know, that's the kind of level that you're gonna want to see to get an economic return on those assets, on Beacon and Empire? And then the second question is just on the cost inflation you're seeing on the portfolio on the non-sanctioned assets.

Is there a difference? Are there any hotspots particularly either in Norway or outside that we should watch? Thank you.

Torgrim Reitan (CFO and VP)

Okay, thank you. Thank you very much, Henry. So, offshore wind, yeah, so very important for me to again say that, that for us to move forward with these projects, we need to have a- they need to be profitable, and then, you know, the returns need to match the risk that we are facing. It is too early to conclude, but we put forward requests in the petition, and that clearly illustrates, you know, changes that needs to happen. I mean, we have communicated that we would like to see 4%-8% real unlevered return from our businesses in, within renewables, and that still is the case.

On cost inflation, and that is the way I understood your question, that is more general, not only related to renewables. So, I would say that, you know, across the supplier base, it is still, you know, a challenge. We see that within the raw materials, and the situation is easing, you know, driven by sort of, you know, global, global growth. Actually, it is easing, but we see a continued tightening in the supplier market. That is driven by energy prices, but also the activity level. And if I should go into more on your hotspots, let me pick a few. On the rigs, we see that, you know, as a challenging environment, 50% of the fleet has been scrapped since 2015.

And, you know, no or hardly any new builds as such. NCS will be strained, but as you have seen, we have taken on capacity with the COSL rigs, so we are in good shape there. Then, if we talk about engineering and construction, we see, you know, short term, you know, high utilization in yards in Norway. That is probably going to last a couple of more years until sort of the wave of new project on the NCS has come in production. Internationally, driven, you know, very much by, you know, LNG new builds and FPSOs as such, so we see a tight situation there as well, but there are opportunities. Yeah.

Then, clearly, you know, across the whole universe of electrification and cables going into renewable and offshore wind, but also the electrification projects we have on the Norwegian Continental Shelf, we see tightness and limitations. So, I mean, it is all of this is pointing to, you know, a rather tight situation, you know, across the supplier base, and we see that sort of filtering into inflation in sort of the numbers that we are looking at. But, you know, as a big company as we are and a big procurer, we have priority, and we will be able to get access to what we will need. So thanks, Henri.

Henry Tarr (Director, Co-Head of Energy and Environment Research)

Thank you very much.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you. We are fast approaching the hour, but let's try to cover one or two more. Chris Kuplent, Bank of America, you are next, Chris.

Christopher Kuplent (Head of European Energy Researc)

Yeah, thank you very much. I hope you can hear me okay. I'll, I'll try and keep it brief with only one talk, Raymond. I know it's an unfair question, and I look forward to February already. But I wanted to just see whether you would like to comment on the fact that you seem to be the only American in Europe when it comes to how you define shareholder distributions, i.e., in billion dollars, rather than in a payout ratio. Do you feel consciously aware of that in the way you are thinking around how you're gonna update us in February? And I'm not asking for a number or anything, just about the principle of guiding for future shareholder distributions through the cycle. Thank you.

Torgrim Reitan (CFO and VP)

Yeah. Thanks, Chris. I think it's, I think it would be wrong for me to be specific here at all, but I can give you maybe one thing to reflect upon, and that is in our cash flow, we typically have so many specialties related to Norwegian tax with delayed payments and all of that. So that is sort of always a disturbing factor if you're going to think about, you know, as such. But you know, we have what we have currently, and you know, we $17 billion this year, and we will come back to this on the Capital Markets Day in February.

Christopher Kuplent (Head of European Energy Researc)

Understood. Thank you.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you. Then we'll do the final question, and that will be you, Paul Redman from BNP Paribas. Paul, please go ahead.

Speaker 15

Last but not least, I hope, everyone. Just one quick one. It's if the agreements with the New York government do not go in a positive direction, and Equinor did step away from the offshore wind portfolio, what could we expect to see at that point? Would we expect to see challenge on the longer-term gigawatt targets? Would CapEx come down? Or when you look at the renewable portfolio, do you have other assets which are high return that could potentially fill the slot that the wind portfolio essentially cannot meet?

Torgrim Reitan (CFO and VP)

Yeah. Okay, thanks, Paul. You know, over the last few years, you know, we haven't won new leases, as such. I mean, we have used opportunity to actually divest out of assets, and capitalizing on significant prices. And instead of sort of, you know, fighting for in these, in these sort of lease rounds, we have actually built an onshore portfolio through acquisition of various, you know, platforms, both in Denmark, Brazil, and Poland as such, with quite a good pipeline of opportunities. So our target for 2030 remains firm. But what you might expect is that there will be maybe a little bit shift of content between offshore and onshore in the delivery of that.

When it comes to sort of, you know, the U.S. project as such, I mean, they are part of our planning, and we are working closely with the New York State on the ongoing process, as such. So, I mean, we will come back to this later on when we know more about the process. We have not concluded yet, and again, that will probably be my final word, any investments into U.S. wind will have to be profitable.

Bård Glad Pedersen (Senior VP of Investor Relations)

Thank you, Torgrim. Let me remind you all that we are, of course, always available in the investor relations team. If there is any follow-up after this call or any additional question, please give us a call and we will do our best. Finally, thank you all of you for calling in and for your question, questions during this hour. Thank you and goodbye.

Operator (participant)

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.