Climate Policies Will Shatter Legacy Fossil Portfolios

Key Takeaways

• Accelerating decarbonization and stricter climate policies threaten future oil and gas demand, pressuring Equinor's revenues and legacy asset values.
  
• Expanding into renewables brings risks of cost overruns, impairments, and regulatory obstacles, which could reduce earnings and create uncertainty around long-term returns.
  
• Equinor's stable gas revenues, production growth, renewables expansion, and disciplined capital management position it for resilient earnings and flexibility amid Europe's shifting energy landscape.

Catalysts

An energy company, engages in the exploration, production, transportation, refining, and marketing of petroleum and other forms of energy in Norway and internationally.

• Accelerating global decarbonization policies and adoption of renewables threaten to structurally reduce long-term demand for oil and gas, which may drive a significant decline in Equinor's future revenues and undermine the value of its legacy upstream portfolio as fossil fuel consumption falls over the coming decades.
  
• Equinor faces heightened execution risks and potential cost overruns in its offshore wind and renewables projects, as evidenced by the large impairment and regulatory changes impacting Empire Wind in the US, which could lead to lower-than-expected returns and further write-downs, directly pressuring future earnings and asset values.
  
• Intensifying ESG-driven divestment from fossil fuels and stricter climate regulations could raise Equinor's cost of capital, constraining access to financing and limiting the company's ability to fund long-term investments, ultimately eroding net margins and reducing shareholder returns.
  
• Rising regulatory and decommissioning costs for Equinor's aging North Sea assets will likely compress future net margins, while high exposure to these mature fields increases the risk of value-destructive decommissioning liabilities and operational challenges as production declines.
  
• Structural decline in global oil demand post-2030, combined with mounting competition from both oil majors shifting aggressively into renewables and pure-play clean energy firms, is expected to erode Equinor's market share and pricing power, putting sustained downward pressure on revenue growth and long-term profitability.

Equinor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Equinor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Equinor's revenue will decrease by 23.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.7% today to 14.8% in 3 years time.
• The bearish analysts expect earnings to reach $7.0 billion (and earnings per share of $2.39) by about August 2028, down from $8.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, down from 7.3x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 7.3x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

Equinor Future Earnings Per Share Growth

Risks

• Robust long-term gas demand in Europe is underpinned by large, multi-decade contracts with major customers in the UK and Germany, ensuring stable revenue and premium margins as the continent seeks energy security and reliable, non-Russian supply.
  
• Equinor's rapid and efficient ramp-up of key projects like Johan Castberg and sustained high production at Johan Sverdrup point to its operational strength and ability to maintain or even grow production through 2035, supporting stable or rising earnings over time.
  
• Strategic portfolio management, including value-creative divestments (Peregrino), swift redeployment to promising areas (Bacalhau), and expanded U.S. gas exposure, improves both revenue diversity and resilience to regional economic shifts.
  
• Increasing investments and leadership in renewables-evidenced by favorable project financing and double-digit equity returns in offshore wind-position Equinor for long-term top-line growth and improved margin resilience amid the global energy transition.
  
• Strong capital discipline, management of cost inflation, and a healthy balance sheet with significant cash positions provide Equinor with the flexibility to sustain shareholder returns, pursue strategic acquisitions, and maintain net margins even in volatile markets.

Valuation

• The assumed bearish price target for Equinor is NOK194.22, which represents two standard deviations below the consensus price target of NOK266.37. This valuation is based on what can be assumed as the expectations of Equinor's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK330.4, and the most bearish reporting a price target of just NOK183.91.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $47.4 billion, earnings will come to $7.0 billion, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of NOK252.8, the bearish analyst price target of NOK194.22 is 30.2% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.