When you think about large integrated oil majors, companies like ExxonMobil, Chevron, Shell, TotalEnergies, and BP probably come to mind first. But Norwegian energy giant Equinor(NYSE: EQNR) is also up there.
Unlike its peers, which have a more distributed ownership base, 75% of Equinor is owned by the Norwegian state and Norwegian private owners. Only 12% of its shareholders resided in the U.S. as of the end of 2022.
Here's why Equinor is a high-yield dividend stock for passive income investors to consider and why it's worth including in a diversified portfolio of fossil fuel and renewable energy investments.
Image source: Getty Images.
A changing energy mix
To understand Equinor, you first have to grasp the Norwegian energy sector. Norway has been drilling offshore in the North Sea for decades. It is blessed with abundant natural resources, and oil and natural gas have been key contributors to the broader economy.
However, Norway's oil fields are mature, and burning oil and natural gas runs contrary to Norway's aggressive environmental targets. These two factors have led Equinor to reduce its dependence on its Norwegian oil and natural gas business and diversify into international oil and natural gas and renewable energy.
Equinor forecasts that its Norwegian exploration and production (E&P) business will have sizable -- but gradually declining -- production and generate high cash flows through 2035. In that year, it expects to produce around 1.2 million barrels of oil equivalent per day (boe/d) from Norway. In the meantime, it plans to grow its international E&P business by 15% between 2024 and 2030 to around 800,000 boe/d while reducing cash flow from operations by $5 per barrel of oil equivalent.
On projects coming on stream within the next 10 years, Equinor expects a breakeven of just $35 per barrel, giving it plenty of room for high-margin returns. Even with the international expansion, Equinor plans to reduce its operated emissions by 50% by 2030 and reduce its net carbon intensity by 40% by 2035.
Equinor's emissions reduction plans are being driven by an overall reduction in oil and natural gas production paired with investments in renewable energy generation, primarily in offshore wind and solar, as well as carbon capture and storage. The Norwegian Continental Shelf (NCS) is uniquely shallow and ideal for offshore wind turbines. But it's far from the only place where Equinor is investing in renewable energy projects. On Feb. 29, Equinor's Empire Wind project off the coast of New York was awarded an offtake contract. The 810 megawatt (MW) project is expected to begin delivering clean power to New York in 2026.
Equinor plans to grow its installed renewable energy capacity at a 50% compound annual rate between 2023 and 2030, reaching an installed capacity of 12 to 16 gigawatts (GW) by 2030, which will net an after-tax return of 4% to 8%. It's not a high-growth business, but it is sustainable, which will allow the company to continue rewarding shareholders with stock buybacks and dividends. Equinor's renewable power generation grew by 17% in 2023. It finished the year with 2.3 GW of gas-to-power generation and 1.9 GW of renewable power generation. Equinor expects its oil and natural gas production in 2024 to be the same as it was in 2023, but is guiding for its renewable power generation to double as more projects come on stream.
Equinor's largest capital return program in company history
In response to strong oil and natural gas prices over the last few years, Equinor has been boosting its capital return program. It plans to spend $6 billion on stock buybacks this year, and $10 billion to $12 billion between 2024 and 2025. It spent $5.6 billion on buybacks in 2023 and $3.3 billion in 2022. If Equinor hits its buyback target, that would mean roughly $20 billion in buybacks in just four years -- a massive amount considering Equinor has a market cap of $76.1 billion. Not even ExxonMobil or Chevron are buying back stock that rapidly.
Additionally, Equinor raised its ordinary quarterly dividend by 17% to $0.35 per share. Between Q4 2023 and Q3 2024, Equinor plans to pay the $0.35 ordinary dividend and a $0.35 extraordinary dividend each quarter, bringing the total to $0.70 per share.
For context, Equinor paid a $0.30 per share ordinary quarterly dividend in the first three quarters of 2023 and a $0.60 per share extraordinary dividend, so management has actually brought the total dividend down some. Like the buyback program, this period of outsized dividends should be temporary, as Equinor expects to boost the ordinary dividend by just $0.02 per year over the long term.
Equinor's planned capital return program for 2024 and 2025 is gigantic: $10 billion to $12 billion in buybacks would reduce its outstanding share count by roughly 14% in just two years. A $2.80 per share annualized total dividend gives Equinor an impressive forward yield of 10.8%. So what's the catch?
A few things to consider
Equinor's share price stock is down by more than 18% year to date, partly because its Q4 earnings missed expectations and its capital return program (buybacks and dividends) is "only" $14 billion this year compared to $17 billion last year. Equinor's dividend payment plans are also subject to review, and the payouts could be cut if its performance is worse than expected.
After all, Equinor cut its quarterly dividend from $0.27 per share in 2019 to just $0.09 per share in 2020 in response to the pandemic-induced energy sector downturn. So it has let down shareholders before.
Moreover, some of Equinor's renewable projects have experienced delays, and the returns on such investments are relatively low as the industry is in a downturn and the cost of capital is higher due to today's higher interest rates. Equinor believes that low-carbon energy is the future, so it isn't doubling down on fossil fuels. This is a much different strategy than that being followed by many U.S. energy companies -- for example, ExxonMobil, which is boosting spending and acquiring Pioneer Natural Resources. Or Chevron, with its Hess acquisition. Or Occidental Petroleum, with its acquisition of CrownRock. Or the planned merger between Diamondback Energy and Endeavor Energy Resources, which will create a Permian Basin powerhouse.
Equinor is an energy stock for investors who believe oil majors should be taking the clean energy transition more seriously. Its yield is going to well exceed that of any other major in the short term. And its stock buybacks will boost future earnings per share.
Investors who appreciate a more balanced approach to the energy sector could consider Equinor as a worthy addition to a diversified portfolio with other top oil stocks.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BP and Chevron. The Motley Fool recommends Equinor Asa, Occidental Petroleum, and Pioneer Natural Resources. The Motley Fool has a disclosure policy.
