Lower Cash Returns And Sector Downgrades Will Pressure Oil And Gas Margins

Key Takeaways

• Equinor faces overvaluation risk due to optimistic assumptions around both oil & gas demand and rapid, profitable renewables growth amid regulatory and margin pressures.
  
• High returns and shareholder payouts may be unsustainable, as legacy assets mature, capex needs rise, and tightening ESG regulations limit growth and investment capacity.
  
• Large-scale project execution, long-term gas contracts, U.S. gas expansion, disciplined financial management, and investment in renewables drive stable returns and future growth resilience.

Catalysts

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

• Persistent market optimism appears to be pricing in continued strong demand for Equinor's oil and gas production due to energy security concerns in Europe, as evidenced by new long-term gas supply contracts to the UK and Germany. However, should policy support for decarbonization accelerate or renewables adoption outpace forecasts, future revenues from upstream output may be pressured, leading to overvaluation risk.
  
• Expectations are high for Equinor's rapid expansion and value creation in renewables, especially offshore wind. Yet, recent impairments on U.S. wind projects highlight regulatory and margin headwinds, indicating that future earnings and net margins from renewables may not offset waning oil & gas cash flows as quickly as the market currently anticipates.
  
• Investors may be overestimating the durability of Equinor's strong net margins and cash flows from the Norwegian Continental Shelf, despite maturing fields, elevated operating costs, and short-term production gains from projects coming online. Risks of structural decline in these legacy assets could weigh on long-term earnings.
  
• Current valuations reflect assumptions of sustained or increasing shareholder returns (dividends and buybacks), but high capital distribution may become harder to maintain if energy prices soften, FX movements turn adverse, or capex needs for transition projects increase, pressuring future EPS and total shareholder yield.
  
• The market may be underappreciating the impact of tightening global ESG regulations and capital allocation shifts away from oil and gas, which could result in a higher cost of capital and reduced access to equity markets for Equinor, ultimately constraining investment capacity and future growth.

Equinor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Equinor's revenue will decrease by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $7.6 billion (and earnings per share of $2.82) by about September 2028, down from $8.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $8.6 billion in earnings, and the most bearish expecting $6.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 7.4x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 5.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

Equinor Future Earnings Per Share Growth

Risks

• Rapid and efficient ramp-up of major projects such as Johan Castberg to plateau production, combined with ongoing high regularity and incremental investments in key fields like Johan Sverdrup, support sustained or growing upstream production and drive potential revenue and earnings stability through 2035.
  
• Securing long-term gas supply contracts with the UK and Germany, which reflect continued European demand and regulatory support for energy security, provides stability and visibility for future cash flows and mitigates the risk of declining revenues in the gas segment.
  
• Accelerated expansion in U.S. onshore gas production (e.g., Marcellus acquisitions) leverages higher gas prices and positions Equinor to benefit from long-term global energy trends (data center and AI-driven demand), supporting net margin growth and cash flow enhancement.
  
• Robust balance sheet management, flat cost development, and active capital allocation (including regular dividends and share buybacks) create the financial flexibility to sustain shareholder returns and support earnings per share even in volatile market environments.
  
• Strategic diversification into offshore wind and renewables, underpinned by project financing at favorable terms and double-digit expected equity returns, establishes new revenue streams and enhances long-term margin resilience as secular trends favor decarbonization and renewables adoption.

Valuation

• The analysts have a consensus price target of NOK258.164 for Equinor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK320.92, and the most bearish reporting a price target of just NOK179.69.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $90.2 billion, earnings will come to $7.6 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 7.0%.
• Given the current share price of NOK241.2, the analyst price target of NOK258.16 is 6.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.