Equinor (Stock Ticker: EQNR): A FCF Machine with a Dwindling Share Count

I believe the oil and gas sector has a bright future ahead. I feel many companies in the oil and gas sector offer a massive, long-term opportunity, reminiscent of how certain bank stocks were undervalued years ago. For this reason, I've been allocating a portion of my portfolio to the XLE ETF to gain broad exposure to U.S.-based companies in the sector. I own several other broad ETFs that also hold oil and gas companies; however, three individual companies I own are Murphy Oil (MUR), Shell (SHEL), and Equinor (EQNR). When I recently observed that EQNR's price was relatively low, I decided to add 20 more shares to my position.

I decided to review these three companies to determine which offered the best opportunity for further investment. While MUR's stock price has rebounded well, I am not overly excited about its performance and free cash flow generation over the past year. Given that oil prices have been declining, and yet MUR has demonstrated historically good performance, it remains a company I will continue to hold and watch.

Shell (SHEL) is probably one of my favorite stocks in the sector. I acquired most of my SHEL shares years ago when oil prices briefly collapsed and even went negative; since then, those shares have more than doubled. I typically hesitate to substantially increase my investment in a stock that has already soared so high from my initial purchase price. However, given its massive Free Cash Flow (FCF) generation and equally impressive share repurchase plans, I still view SHEL as one of the best value stocks in my portfolio. Since I already own over 100 shares of Shell, and I believe that position will grow into a five-figure value in the not-too-distant future, I decided to increase my position in Equinor (EQNR) instead. I believe EQNR is in a similar position to SHEL, fueling its large-scale share repurchase program with its own massive FCF generation. In contrast to many large tech companies that spend their repurchase capital on bloated share prices, both SHEL and EQNR are repurchasing shares at what I consider to be undervalued prices.

FCF, Valuation, and the Price of Oil

Equinor (EQNR) currently holds a market capitalization of approximately $58 billion. The company's FCF generation has been impressive: $20.776B in 2021, $26.378B in 2022, $14.126B in 2023, and $7.933B in 2024. The Trailing Twelve Months (TTM) FCF currently stands at $7.038B.

The clear trend of declining FCF over the years is, admittedly, worrying. However, this trend is heavily correlated with the price of crude oil. My opinion is that oil prices will rise in the future. I do not foresee geopolitical tensions easing significantly, and the destruction of energy infrastructure due to conflict will naturally decrease global supply. Furthermore, current and future conflicts require significant energy, as does the subsequent rebuilding from the devastation of war. As nations race for technological supremacy, energy demand will only continue to rise. Simultaneously, global infrastructure build-out and advancement will result in continually growing energy demand.

While inflation seems to be an ever-present force, crude oil prices appear to be one of the few commodities not currently rising. I believe a change is inevitable, especially considering the rapid shifts in global political relations. The current Price-to-FCF ratio, using the TTM FCF, comes out to 8.24. Given my favorable opinion on future oil prices, I believe the stock is undervalued at this price. Even if prices remain stable, I believe EQNR is a FCF machine at its current valuation.

Shareholder Returns and Fiscal Responsibility

EQNR has executed over $20 billion in share repurchases since 2021. This represents more than 30% of its current market capitalization. One might assume this level of buybacks would have caused the stock price to skyrocket; on the contrary, the price is currently lower than it was in 2021. In that same period (2021 to present), EQNR has also dedicated close to $15 billion toward debt repayment.

These actions, coupled with significant dividend payments over the past five years, clearly demonstrate the company's focus on fiscal responsibility and shareholder returns. The company previously paid an extraordinary cash dividend on top of its ordinary cash dividend. The fact that the company recently ended the extraordinary cash dividend makes me an even bigger believer in its long-term future. It shows the company is capable of making fiscally responsible decisions when necessary, even if it leads to common investor dissatisfaction. It is a nightmare to see companies pay dividends with funds they cannot afford, simply based on an optimistic future outlook.

A Healthy Balance Sheet

As of the latest filing, EQNR’s balance sheet shows $22.390 billion in cash and short-term investments, against only $25.071 billion in Long-Term Debt. This is an exceptionally healthy balance sheet, especially in an era where many companies are heavily burdened with debt. Current Shareholder Equity stands at $40.592 billion. Seeing this relative to a $58 billion market cap is a strong indicator.

Revenue and net income have experienced bell-curve patterns over the 2021-to-present period, peaking in 2022. From 2021 to the TTM period, revenue has increased from $88.774B to $107.066B, while Net Income has declined from $8.563B to $5.725B. While these patterns are not ideal, they are to be expected: increased production driven by geopolitical conflicts has boosted revenue, but this is offset by inflation, increased spending, and falling oil prices eating away at profit margins.

Conclusion

Ultimately, the price of oil will have the biggest impact on EQNR’s future share price and fundamentals. No one can predict where oil prices—and, by correlation, the share price of EQNR—will go. However, because I hold a favorable outlook on the future of oil and gas prices, I believe EQNR remains a strong investment.

My conviction is primarily driven by the company's demonstrated focus on shareholder returns and fiscal responsibility over the years. This is evidenced by its debt repayment efforts, maintenance of a healthy balance sheet, and the prudent decision to cut its extraordinary dividend in the current environment. I believe these strengths position it well to survive any short-term setbacks. Furthermore, the high level of share repurchases (funded by disposable FCF) at what I view as an undervalued share price could create a "perfect storm" for a significant stock rally if energy demand and oil prices rise in the future.