Equinor ASA

Ladies and gentlemen, good morning and apologies for the slight delay to the start of this call. I'm delighted to welcome you all to our second quarter 2020 analyst call. With me on the line in Oslo, we have Lars Christian Bakker, the CFO, and Spine Shire, who's the Head of Performance Manager. Also joining the call is Oyan Kervana, who is Head of Accounting. He's calling in from Stavanger, and I'm here in London. With that, I'm delighted to pass straight over to Lars Christian to start the call. We will have questions for the rest of the hour that we have on this call. Thank you very much.

Thank you, Peter. And good morning, everybody. We really appreciate you joining us today. I hope that you... Your families and your colleagues are all doing well. Let me start by saying that this has been a second quarter and a first half year like no other. Our most experienced traders call it the most dramatic quarter in oil market history. In April, dated Brent, the reference price for most of our liquid product sales, reached a low point of $13.20 per barrel. and at one point the WTI plunged into negative territory for the first time in history. In addition, European gas prices were at the lowest in more than a decade. Prices have since partly recovered, especially for oil, but the economy remains well prepared for continued volatility going forward. Many countries are now gradually opening up, but the path toward recovery from the global pandemic remains tentative and uncertain at all our locations offices fields and facilities the safety and well-being of our people are top priorities this year we have really seen the value of having solid contingency plans for low price scenarios we took rapid and forceful actions to protect our financial position in that extraordinary situation and we now see the effects Costs and capex are down, and through suspension of share buybacks, cut in dividend, and bond issues at attractive rates, we secured our liquidity and financial flexibility. And thanks to quick and effective action, we have had less than 1,000 barrels per day in production loss due to COVID-19. Our results are, as expected, impacted by the prices in the quarters. However, Equinor was able to not only capture significant value, but also provide the flow assurance needed for stable and reliable operations. They delivered record high results from our MMP segment, with very strong trading results within crude and liquids. As CFO, I'm happy to see the organization continue to deliver cost reductions and solid operations. We are also progressing our quality portfolio projects under development within oil, gas, and renewables, despite delays on a small number of projects due to COVID-19. The very low prices increased our net debt ratio to 29.3% from 25.8% at the end of Q1. Going forward, we will work diligently and systematically to continue to strengthen our competitiveness. Let me spend a few minutes on the temporary tax changes in Norway. In June, the temporary changes in the petroleum taxes were decided by a broad coalition in the Norwegian Parliament with the purpose of maintaining investment, activity, and value creation in the oil and gas industry. To operators and suppliers in Norway, including Equinor, this secures frame conditions, which makes it possible to continue progressing with planned profitable development projects. For 2020 and 2021, we can now fully expense all NCS investments against the 56% special petroleum tax rate in the year they are incurred rather than over six years. For 2020 and 2021, the uplift have been increased from 24% to 24% from 20.8%. And we are also allowed to expense the uplift towards the special tax the year we invest, rather than previously over four years. These changes will also apply to new project sanctions by the end of 2022, with impact on tax and cash tax or cash flow in subsequent years. Over time, the temporary changes are close to neutral, cash-wise and in nominal terms, since the taxes saved due to direct expense will be paid back in later years. So, to the effect of the changes for Ekinur as a company. These temporary tax changes provide liquidity and enhance project economics. Under these terms, cash tax charges from second half will be materially lower. Indeed, we expect the next settlement due in August to be a cash receipt of around 1.5 billion Norwegian kroner. The changes in fiscal terms increase the profitability of our project on the MCS, sanctioned by 2022, and improve breakeven prices by around $10. Such improvements will influence the ranking and facing our projects. And now I move on from tax. As we have tackled the demanding market situation, our strategy remains firm. We are developing as a broad energy company and aim to create long-term value through the energy transition and in a low-carbon future. In the quarter, we have achieved milestones on the climate ambition we communicated earlier this year. Approval of the PDO for our floating offshore wind project, Highwind Thumpton, The investment decision on partial electrification of Sleipnir. Investment decision on Northern Light project for transportation and storage of CO2. In line with our dividend policy, our board of directors have considered expected cash flow, capital expenditure plans, financing requirements, and appropriate financial flexibilities. And again, it's a difficult quarter in terms of prices. The board has decided on a dividend of 9 cents per share for the second quarter of 2020 at the same level as for first quarter 2020. Let me then turn to the quarterly results. And as usual, I start with our safety performance in the quarter. We have a systematic and proactive approach on safety and security. This quarter, the efforts have been particularly focused on preventing the spread and impact of COVID-19. We report a serious incident frequency of 0.6 and an overall injury frequency rate of 2.3 million, 2.3 per million working hours the last 12 months. Compared to 2019, this is an improvement in overall injury rate, while the frequency of serious incidents is at the same level. Let me then go into more detail on the quarterly financial results. A realized liquid price in the quarter was $22.9 per barrel, down 61% from the same quarter last year. This is below the average dated Brent for the quarter at $29.2, mainly explained by differentials for the light and quality. Our average European invoice gas price in the quarter ended at $2.24 per million BTU, down 59% from the same quarter last year. In the U.S., our average realized gas price was down 37% to $1.47 per million BTU. The IFRS net operating income in the quarter was negative $472 million, down from $3.5 billion in the second quarter last year. Adjusted earnings were $354 million positive, down from $3.2 billion. We are happy to report that we are on track to deliver the $700 million cost reductions announced in the first quarter. The temporary changes in the tax regime have some special effects on our after-tax results this quarter. As a consequence of increased uplift applicable from January, We also recognize the benefit for the first quarter and second quarter, which contributes to a negative tax rate of 82.3%. After tax, we delivered a negative IFRS result of $251 million, down from $1.5 billion last year, while adjusted earnings after tax were positive, $646 million, down from $1.1 billion. Then to the segments. From this quarter, EMP USA is a separate reporting segment, and we provide increased visibility of renewables within the other segment. EMP Norway delivers negative adjusted earnings of $85 million, caused by very low prices for both oil and gas. They are chosen to defer significant gas volumes to periods for higher expected prices, and we have adhered to government-imposed oil production cuts in June. EMP Norway delivered strong operations in the quarter, with underlying operations cost down 8% per barrel. EMP International delivers negative adjusted earnings of $379 million. This result is due to the low prices combined with lower production and higher depreciation per barrel. At the same time, we also see a clear cost reduction in this segment. EMP USA is also affected by the very low prices. This segment delivers negative adjusted earnings of $341 million. In the U.S., we see the biggest cost reductions with a 10% reduction in the underlying operating cost per barrel and a 22% reduction in adjusted operating and administration costs. We have substantially reduced drilling and completion activity onshore to adapt to the market situation compared to the same quarter last year. The marketing, midstream and processing segment delivered record high adjusted earnings of nearly $1.2 billion this quarter. The record result is mainly due to strong contributions from oil trading, capturing value in volatile markets, benefiting strongly from taking positions backed by solid assets. Renegotiations of gas sales contracts also contributed to the adjusted results, with a one-off effect of around $150 million. In our other segment, we get contributions from our renewable plants in operations, or $38 million in net income. After adjusting for costs such as progressing and maturing our next milestone projects, Dogger Bank and Empire Wind, the total reported results for NAS was around zero. Equinox equity production in the second quarter was 2,011,000 barrels per day on par with the second quarter last year. In the quarter, we delivered a high production efficiency with increased capacity from new fields and wells and had no turnaround activity offshore. Against its background, a good operational efficiency. Volumes on the NCS in June were affected by the curtailments announced by the Norwegian government. Also, our international business was impacted from OPEC Plus actions. Adjusted for divestment of assets and government-imposed production curtailments, we still delivered an underlying production growth of more than 4%. We put value over volume and moved significant gas volumes out in time to pair it with higher expected prices, mainly on the NCS. On the NCS, it is notable positive that the liquid production growth is 33%. The startup of Johan Sveidrup with very low operating costs is the main driver. Let me also mention that we made three commercial discoveries in the quarter, while two wells are still under consideration. So far this year, we have made six commercial discoveries in Norway and internationally, which bodes well for future value. The production for our renewable business was 300 gigawatt hours after conducting maintenance at the Dudgeon. Adjusted for the sale of half of our ownership interest in our corner, production is at about the same level as last year. The cash flow slide represents over the year. Note that the cash flow from operations is affected by the prices in first half 2020, while the taxes and dividend paid are related to 2019. We paid taxes of $2.6 billion so far, with $1.5 billion related to NCS in the second quarter. Dividend payments in the first half totaled $1.75 billion. Organic investments are at $4.1 billion, while we sold our shares in Lundin Energy for $332 million as a good return. The net debt ratio at the end of the quarter increased to 29.3%. Before I move to Outlook, I would like to mention that to maintain our strong credit ratings, and we have also received ratings from our affiliates, Ekinor New Energy and Danske Commodities. Both achieved BBB plus equivalent ratings and are strategically important to Ekinor in creating value through the energy transition. So let me end with our guiding. We will continue to put value over volume, in demanding markets. This makes it difficult to commit to guiding on production growth in 2020, but we still expect average annual production growth of about three percent from 2019 to 2026. Expiration activity is expected to come in at around 1.1 billion dollars. This is slightly up from first quarter, partially due to the drilling of equation wells around new discoveries. Our guiding for organic investment remains unchanged in U.S. dollars at around 8.5 billion and around 10 billion in 2021. However, note that we have used an exchange rate of 9.5 kroner per U.S. dollar, down from 11 kroner per dollar last quarter in our guiding for exploration and organic investments. And with that, I'm pleased to open up for questions, and I hand it back to you, Peter.

Thank you, Lars Christian, and we do open up the questions, and I'll pass it back to the operator to remind you of the polling.