Investing.com -- Equinor ASA (OL: EQNR ) has been downgraded to “underperform” by analysts at RBC Capital Markets, with the price target revised downward to NOK260 from NOK300, in a note dated Tuesday.

The downgrade is driven by expectations of compressed free cash flow, rising leverage, and reduced total shareholder returns relative to peers, as well as increased execution risks related to certain projects.

Equinor has benefited from exceptionally high European gas prices in recent years, returning $40 billion to shareholders between 2022 and 2024, which represented 44% of its market capitalization at the end of 2021.

However, RBC expects these extraordinary conditions to subside, with the company shifting to a more "normal" balance sheet position.

The focus will likely turn towards balance sheet health, where Equinor is at a disadvantage compared to its peers.

Due to the lagged nature of Norwegian tax payments and the structure of Equinor’s buyback program, RBC expects the company’s gearing to rise faster than most peers, increasing from 9% in Q1 2025 to 23% by year-end, with a potential rise to nearly 30% by 2026.

This compares to the sector average of 10-20% over the same period. As a result, RBC forecasts a sharp reduction in buybacks from $5 billion in 2025 to $2 billion in 2026, which will likely lead to a drop in TSR from ~15% this year to around 10% in 2026.

RBC also expresses concerns about additional calls on free cash flow, particularly following Equinor’s $2.5 billion acquisition of a 10% stake in Orsted (CSE: ORSTED ).

Although the deal was seen as potentially positive long term, it has drawn scrutiny, especially as the acquisition is currently out of the money.

RBC speculates that Equinor may increase its stake in Orsted, further limiting cash available for distributions.

Additionally, there is market speculation that Equinor could be interested in acquiring part of Uniper, though RBC questions the strategic rationale for increasing exposure to a market with limited growth prospects.

Regarding the European gas market, RBC remains bearish, projecting that gas prices will soften more than the forward curve currently suggests.

The analysts anticipate that the global LNG supply will grow, especially with new projects such as Venture Global’s Plaquemines ramping up faster than expected.

Additionally, LNG demand from Asia, particularly China, has declined, contributing to an overall increase in available LNG supply for Europe.

As a result, RBC forecasts downside risk to gas prices, particularly in 2026, which could negatively affect Equinor’s FCF and stock performance.

A key risk to Equinor’s outlook is its Empire Wind project in the U.S., where regulatory hurdles have raised concerns.

The U.S. Department of the Interior recently ordered a halt to construction due to insufficient environmental review.

Equinor, which took full ownership of the project in early 2024, faces uncertainty around its $5 billion capex commitment, including whether it will receive the expected $2 billion in tax credits.

Given the project’s low return expectations (4-8%), RBC sees a heightened risk of impairment, which would further pressure Equinor’s balance sheet.

Following minor revisions to upstream and midstream contributions, as well as a deferral of Empire Wind’s start-up to 2030 (from 2028), RBC has lowered its 2026 EPS estimate by 6%.

The updated price target of NOK260 reflects a normalized EV/DACF valuation based on a $70/bbl oil price. Under a $60/bbl scenario, the value would fall to NOK215.