Equinor Floats a Windy Dream

Wind energy adoption has been impressive.  In Denmark, where iconic water-pumping wind mills still grace the landscape, power generating turbines atop tall wind towers now provide as much as 40% of that country’s energy requirement.  Wind has also become critical in Portugal and Ireland.  In the energy hungry United States wind still has a long way to go, providing only 6.5% of U.S. power.

For some, environmental concerns still niggle at decision makers, slowing the progress of wind projects.  Off-shore wind energy installations in particular present risks to the environment.   

The Block Island Wind Farm in Rhode Island was the first off-shore wind project in the U.S.  Generating 30 megawatts from five six-megawatt generators perched atop towers sunk in the Atlantic, the project had many detractors.  The developer, Deepwater Wind, faced protest by environmentalists protecting both marine and avian interests, a few of which were noted on an earlier post “Firsts for Deepwater Wind” published in October 2017.  There had been an expectation of massive decline in bird populations as access roads and maintenance areas displace nests and whooshing blades put many to death.  Even after the noisy construction process was completed the wind towers were expected to transmit low-frequency sounds through the water, disrupting the echolocation some marine mammals use for hunting and navigating.

The verdict is still out on whether the Block Island Wind Farm is getting on with its feathery and fishy neighbors.  The advancement of renewable power is too important in a world threatened by global warming.  Equinor ASA (EQNR:  NYSE)  (formerly Statoil) may have a solution to the collateral damage from conventional wind towers.

Hywind Scotland is the world’s first wind farm to feature floating wind turbines.  A joint venture with Masdar Clean Energy of the United Arab Emirates, the project runs on five 6-megawatt turbines with a total capacity of 30 megawatts.   Winds are stronger and more consistent further out to sea.  Unfortunately, far off from shore the waters are too deep to install conventional towers.  Equinor can reach these locations with its floating turbines that are tethered to the seabed with cables.  The turbines float on the waves like giant fishing bobbers.

Located so far out to sea some of the environmental issues are potentially resolved.  Since the apparatus is built on-shore in a factor there is no construction noise.  However, there is still the potential for the operating turbines to annoy sea mammals.  Similarly, there is less frustration of birds that habituate the shoreline, but still some risk for migratory birds is the turbines are floated to historic skyways for long-distance flyers.

Equinor spent a decade demonstrating the merits of its floating turbine technology before constructing and deploying Hywind.  What is left to be proven is the economics of power generation so far from the electrical grid.  Hywind Scotland racked up a construction cost of NOK 2 billion (US$220 million).  Equinor has been mostly silent on the operating costs

Investors can take a cue from the company’s project pipeline as to whether Hywind Scotland is panning out.  Equinor is pushing forward with another off-shore floating turbine project called Hywind Tampen that is budgeted to require NOK 566 (US$545 million).  The 88 megawatt project will supply power to oil and gas facilities.  The takeaways from Equinor’s efforts is that off-shore floating turbines work well enough, but construction and operating costs are high enough to render uneconomic any scheme to transmit output to on-shore users. 

A position in Equinor buys investors quite a bit more than a stake in off-shore wind power.  The company may have erased ‘oil’ from its name by dropping Statoil in favor of Equinor, but its legacy in the fossil fuel trade remains with the company.  It will take many more years for the company to transform into a renewable energy operation.  The time may be right to take a position.

Equinor is currently trading near 28 times trailing earnings after a boost from oil market trades made at the beginning of 2020 as the coronavirus pandemic roiled the crude oil price.  Exceptional profits were made possible as the company’s in-house traders snapped up crude oil on the cheap as oil prices plummeted as the virus threatened economic activity around the world.  The crude was then sold forward at higher prices.  Still recent net income has come in well below what now appears to be halcyon days a year ago.

Investors taking a bite of Equinor will also need to be ready for possible reset of asset values.   In the quarter ending June 2020, Equinor recorded an asset impairment charge of totaling US$370 million to acknowledge the reduced value of assets held at a gas processing plant in Norway as well US$560 million in intangible values related to exploration assets.  This brought total impairment charges for the year 2020, to US$529 million. Of course, there figures are not alarming given property, plant and equipment valued near US$64 billion.  Still more frequent and larger asset impairment charges are expected across the oil and gas industry.  In June 2020, BP Plc (BP:  NYSE) wiped out US$17.5 billion from asset values.  Royal Dutch Shell Plc has also announced intentions to reduce asset values by US$15 billion to US$22 billion as its leadership frets over lower oil prices on what industry leadership now seems to believe is permanently reduced demand. 

The key question for anyone wanting a position in Equinor is whether it can bring renewable energy sources on fast enough to make up for what appears to be quickly diminishing value in its oil and gas business.  Some might consider the ubiquitous quarterly dividend as a good consolation prize for oil and gas position.  No so fast?    Shell recently cut its dividend, demonstrating that even the near sacrosanct check from oil and gas shares can be vulnerable.   Equinor followed suit in early May 2020, cutting its dividend by two-thirds.  The stock’s current forward dividend yield is now 2.25%.  The company also suspended its share buyback program, another less obvious but effect way of building shareholder value.  With dividend and buyback decisons already reflected in the stock price some investors might find Equinor’s shares not only interesting but timely.    

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.