Woodside Petroleum Ltd

Company Overview: Woodside Petroleum Ltd (ASX: WPL) is an Australian oil and gas company, mainly involved in delivering sustainable energy solutions to shareholders, communities, governments and other stakeholders. The company is recognised for its world-class capabilities as an integrated upstream supplier of energy. In Western Australia, WPL operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO. It also has participating interest in Wheatstone and equity interests in Canada (Kitimat LNG) and Timor-Leste/Australia (Sunrise).

WPL Details

Track Record of Delivering Decent Production & Cashflows: Woodside Petroleum Ltd (ASX: WPL) is Australia’s leading LNG operator and natural gas producer, recognised for its world-class capabilities as an integrated upstream supplier of energy. As of 27 January 2021, WPL’s market capitalisation stood at ~A$25.33 billion. The company is focused on delivering superior returns to shareholders through its efficient base business and the execution of high-quality growth opportunities. On the back of solid production, WPL has been delivering significant cashflows and has maintained a decent track record of profitability. From 2015 to 2019, the company’s NPAT and operating cash flow grew at a CAGR of 190.58% and 107.5%, respectively.

Production, Cashflow and Profitability Trend (Source: Company Reports)

Despite the challenging conditions in FY20, WPL continued its momentum of decent production and ended the year with total annual production of 100.3 MMboe, up by 12% on FY19. WPL recently completed Sangomar acquisition from Cairn and is now planning to commence development drilling as it progresses the project to targeted first oil in 2023. Looking ahead, the company is focused on preparing for the targeted investment decisions in Scarborough and Pluto Train 2. Moreover, the company’s investments in technology and offsets, along with its early-mover activities in hydrogen, positions it well to provide value through the energy transition.

H1FY20 Performance Highlights: Despite the challenges caused by the COVID-19 pandemic, the company had reported highest ever first-half production of 50.1 MMboe in H1FY20. Over the period, WPL achieved low unit production cost of US$4.5/boe across its portfolio and reported a positive free cash flow of US$264 million. In response to the COVID-19 pandemic, WPL reduced its total expenditure in 2020 by 50% and delayed final investment decisions (FIDs) on its Scarborough, Pluto Train 2 and Browse developments. Due to non-cash impairment losses and onerous contract provision announced in July 2020, WPL incurred a net loss after tax of US$4,067 million in H1FY20. For H1FY20, WPL has declared an interim dividend of 26 US cents per share (cps), representing an approximately 80% payout ratio of underlying net profit after tax which stood at US$303 million. At the end of H1FY20, the company had total liquidity of US$7,552 million, up 43% from H1 2019. WPL continued its decent production performance in September 2020 quarter as well and reported production of 25.3 MMboe. WPL delivered sales volume of 26.7 MMboe in Q3FY20, up 10% from Q3 2019.

H1FY20 Results (Source: Company Reports)

Key Metrics: For H1FY20, WPL reported gross margin and EBITDA margin of 7.2% and 37.6%, respectively, higher than the margins reported in the previous corresponding period (pcp). Current ratio for H1FY20 stood at 2.65x, lower than 3.45x in pcp. Debt to Equity multiple stood at 0.61x, higher than 0.40x in pcp.

Profitability Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 12.75% of the total shareholding while the top four constitutes the maximum holding. BlackRock Institutional Trust Company and The Vanguard Group, Inc. are holding a maximum stake in the company at 2.95% and 2.65%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Q4FY20 Result Highlights: For December 2020 quarter (Q4FY20), the company reported production of 24.9 MMboe, down by 2% from Q3 2020, contributing to record annual production of 100.3 MMboe. Further, the company reported sales revenue of US$920 million, up 32% from Q3FY20, due to higher oil and gas prices. Sales volume for the quarter also grew by 9% QoQ to 29.1 MMboe. During the quarter, the company achieved various milestones which included receiving production licences for the Scarborough development, doubling the quantity of LNG to be supplied to Uniper from 2021 and completing the acquisition of Cairn’s interest in the Sangomar Field Development.

Sales Volume and Revenue (Source: Company Reports)

Expanded Long-Term LNG Supply Agreement: On 18 January 2021, the company announced that one of its subsidiaries, Woodside Energy Trading Singapore Pte Ltd, has agreed to amend the binding long-term sale and purchase agreement with Uniper Global Commodities SE to increase the supply of LNG from WPL global portfolio to Uniper, demonstrating the strong market demand WPL is witnessing for Scarborough LNG as customers consider their energy requirements from the second half of this decade. Under the amended SPA, the quantity of Woodside LNG to be supplied to Uniper has doubled.

Completed Sangomar Acquisition from Cairn: On 23 December 2020, the company announced that it has completed the acquisition of Capricorn Senegal Limited’s (Cairn) entire participating interest in the Rufisque Offshore, Sangomar Offshore and Sangomar Deep Offshore (RSSD) joint venture, increasing WPL’s participating interest in the RSSD joint venture to approximately 68.33% for the Sangomar exploitation area and to 75% for the remaining RSSD evaluation area. WPL plans to increase its interest to 82% for the Sangomar exploitation area and to 90% for the remaining RSSD evaluation area subject to completion of the FAR acquisition. It is worth noting that the acquisition of Sangomar is value accretive for WPL shareholders as it is an attractive, de-risked asset in execute phase, offering near-term production.

Key Risks: WPL is exposed to the risks related to the fluctuations in the prices of oil and gas. Further, the company is also exposed to the risks related to the impacts of COVDI-19 pandemic. WPL’s financial strength and performance may be impacted by numerous factors like disruption in market dynamics and the ability to maintain a competitive advantage.

Outlook: WPL recently completed its full-year FY20 and reported total annual production of 100.3 MMboe, up by 12% on FY19. It intends to release its full year 2020 results on 18 February 2021. Looking ahead, the company is focused on the development of Sangomar and is on track for targeted first oil in 2023. Further, the company is focused on preparing for the targeted investment decisions in Scarborough and Pluto Train 2. With regards to its Scarborough project, WPL expects the project to deliver a net cash flow of approximately US$35 billion over the life of the field, based on the company’s current participating interest.

WPL expects its total output for FY21 to be between 90 to 95 million barrels of oil equivalent. The total investment expenditure is expected to be in the range of US$2,900 – US$3,200 million.

Production Guidance (Source: Company Reports)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

** 1 USD = ~1.29 AUD

Stock Recommendation: Over the last three months, the stock has provided a return of 43.70%. The stock has 52-weeks low and high of A$14.930 and A$35.07, respectively. On the technical analysis front, the stock has a support level of ~A$22.12 and a resistance level of ~A$30.38. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a premium to its peer average/median EV/EBITDA (NTM Trading multiple), considering the improving oil and gas prices, recently received production licences for the Scarborough development, and decent long-term outlook. We have taken peers such as Oil Search Ltd (ASX: OSH), Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY), etc. Considering the company’s track record of delivering substantial cashflows, decent production performance, expanded long-term LNG supply agreement with Uniper, recently completed acquisition of Sangomar, and valuation, we give a “Buy” recommendation on the stock at the current market price of A$25.57, down by 2.887% on 27 January 2021.

WPL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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