Large financial losses in Norwegian state-controlled Equinor's US onshore business are the result of prioritising rapid growth over value creation and control, as well as optimistic oil price assumptions, the firm said in a report published today.
Equinor conducted an aggressive growth and mergers and acquisitions strategy in the "boom" years before the 2014-16 oil price crash, setting an ambition in 2011 to increase production by 30pc to over 2.5mn b/d in 2020. Equinor has invested around $40bn in the US since 2007 and spent over $10bn on acquisitions.
But its strategy came at the expense of "value creation and control in the US onshore business," ultimately leading to an accounting loss of $21.5bn on its US activities from 2007-2019. Of this, $9.2bn came from impairments of onshore assets.
Equinor's acquisitions and investments relied on the expectation that oil prices would increase — remaining above $100/bl for the foreseeable future — without testing transactions for robustness in a low-price scenario.
The report gives particular focus to Equinor's $4.7bn acquisition of US independent Brigham Exploration in 2011 at a premium to its base value that the internal valuation struggled to justify.
There was a push from executive management for the acquisition to go through, despite a business case which relied on high oil price assumptions and on realising upsides.
"[This] meant the business case for acquiring Brigham was marginal. Any drop in the price, or even a small setback in developing the asset would potentially expose the company to impairments," the report said.
The firm also faced control problems in the business support functions as a result of ramping up operational activity to a level that overwhelmed its systems and processes. It overestimated the "complexity" of operating US onshore and overestimated the firm's capabilities, tasking leaders with little to no previous experience from this part of the industry with overseeing this section of the business. And reorganisation and changes meant a lack of continuity.
"We should have seen the control problems in the onshore business earlier. Our job now is to learn, and to turn the recommendations into concrete actions to ensure we do not experience something similar again," chief executive Eldar Saetre said. Anders Opedal will replace Saetre on 2 November.
The report recommends Equinor improve decision-making for new business investments, strengthens the governance of new business activities and risk management across corporate functions, further develops leadership capabilities, and ensures continuity in key roles.
The report — led by a PwC accountant — is based on over 120 interviews and documentation dating back to 2005.
