Equinor's Share Buy-Back: A Strategic Move or a Misstep?

Equinor ASA, the Norwegian energy giant, has announced a two-year share buy-back program worth USD 10-12 billion for 2024-2025, with up to USD 6 billion allocated for 2024. The first tranche of up to USD 1.2 billion is set to commence on 8 February 2024. This move has sparked interest and debate among investors and analysts alike, with some hailing it as a strategic move and others questioning its wisdom.

Equinor's share buy-back program aligns with its long-term financial strategy and dividend policy. The company aims to reduce its issued share capital, which can lead to an increase in earnings per share (EPS) and potentially enhance shareholder value. By repurchasing and cancelling its own shares, Equinor can boost its EPS, making each share more valuable. Additionally, the share buy-back program can signal confidence in the company's future prospects, as management believes that the shares are undervalued.

However, the Norwegian State's participation in the share buy-back program raises some concerns. The State, which maintains a 67% ownership stake in Equinor, will redeem and annul a proportionate number of its shares to maintain its ownership interest. While this ensures that the State's influence and control over the company remain unchanged, it also means that the State will continue to receive dividends proportionate to its shareholding. This could potentially lead to a higher dividend payout ratio for other shareholders, as the State's shareholding remains constant while the number of outstanding shares decreases.

Moreover, the share buy-back program may impact Equinor's debt-to-equity ratio and overall financial leverage. By reducing the share capital and potentially reducing debt, the share buy-back program can improve Equinor's debt-to-equity ratio, indicating a lower level of financial leverage. However, if the company uses debt financing for the share buy-back, it may increase its debt levels, which could negatively impact its financial leverage.

Equinor's share buy-back program is expected to have a positive impact on the company's EPS and return on equity (ROE) in the long term. By reducing the number of outstanding shares, the company can increase its EPS on a per-share basis, leading to a higher ROE. This is because the net income attributed to each share increases as the number of outstanding shares decreases.

In conclusion, Equinor's share buy-back program is a strategic move that aligns with the company's long-term financial strategy and dividend policy. However, the Norwegian State's participation in the program and its potential impact on the company's debt-to-equity ratio and financial leverage raise some concerns. Investors should closely monitor the progress of the share buy-back program and its impact on Equinor's financial performance and shareholder value.