Norway's Equinor posted its strongest quarterly result in nine years on Wednesday, driven by a global energy supply crunch that pushed Europe's natural gas prices to record highs and sent the value of derivative contracts soaring.
The company said it would sharply increase the size of its share buybacks in coming months, while maintaining a quarterly dividend level of $0.18 per share.
Adjusted earnings before tax rose to $9.77 billion in the July-September quarter from $780 million a year ago, exceeding the $8.4 billion predicted in a poll of 25 analysts compiled by Equinor.
"The current unprecedented level and volatility in European gas prices underlines the uncertainty in the market," Chief Executive Officer Anders Opedal said in a statement.
"Equinor has an important role as a reliable energy provider to Europe and we have taken steps to increase our gas exports to respond to the high demand."
Norway is western Europe's largest oil and gas producer, pumping around 4 million barrels of oil equivalent per day. Last year, it supplied 22% of the gas consumed in the European Union, according to Norwegian government data.
Equinor has said it would seek to boost pipeline gas exports to Europe by increasing production from Troll and Oseberg fields, as well as from reducing gas injections normally used to pump oil.
Global gas prices rose sharply in the third quarter, with Europe's benchmark TTF front-month contract increasing threefold to around 90 euros per megawatt hour (MWh) due to rising demand, below average storage levels and concerns over Russian supply ahead of the winter heating season.
In early October, the gas price spiked https://www.reuters.com/article/power-prices-europe-idINL1N2R10AQ again, hitting a record of 155 euros per MWh before easing to 89 euros on Tuesday. The price of North Sea crude oil has meanwhile risen 67% this year to trade at a three-year high of $86 per barrel.
DERIVATIVE GAINS AND LOSSES
Earnings at Equinor's marketing, midstream and processing (MMP) unit rose to $2.19 billion from $262 million, boosted by derivatives contracts related to European gas, the company said.
Equinor sells most of its gas on a short-term, or spot, basis but also sells a small share based on longer-dated indices. For the latter, MMP has used financial contracts to change the price exposure to benefit from strong spot and front-month pricing.
The mark-to-market gains from such contracts in the third quarter will be followed by losses in the MMP segment when those volumes are delivered under the long-term contracts, Equinor reiterated in its earnings report.
"The decision to take derivative positions has been beneficial to the group but created volatility in this segment," the company said in reference to the MMP unit.
The one-off nature of the MMP gains should be a note of caution for investors, SpareBank 1 Markets analyst Teodor Sveen-Nilsen said.
"MMP's profitability is a black box with low visibility," he wrote in a note to clients.
Still, Equinor's share price could outperform peers by some 2-4% on Wednesday, the analyst added.
BUYBACK OF $1 BILLION
The increased energy cost has led to soaring electricity prices across much of Europe and the world, hitting household as well as companies which have been forced to shut factories as profits eroded, triggering more supply chain shortages.
Equinor plans to buy back shares worth $1 billion during the next three months, up from its previous plan to purchase $300 million worth of shares.
During the previous three months, the company had also planned to buy up to $300 million worth of shares, but ended up spending just $99 million.
Equinor revised its capital spending for 2021 to $8.0 billion from a range of $9 billion to $10 billion seen previously. The average for 2021 and 2022 will still be between $9 billion and $10 billion, however.
It kept its plans to spend around $12 billion per year in 2023 and 2024.
Equinor's shares have risen 60.6% year-to-date. Trading on the Oslo Bourse is due to resume at 0700 GMT.
(Reporting by Nerijus Adomaitis and Nora Buli; editing by Subhranshu Sahu and Jason Neely)