Woodside Petroleum Ltd

Company Overview: Woodside Petroleum Ltd (ASX: WPL) is an integrated upstream supplier of energy with world-class capabilities. The company is focused on providing affordable energy solutions that deliver enduring value to shareholders, communities, governments, and other stakeholders. The company runs a robust hydrocarbon business with a focus on LNG. WPL also operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO.

WPL Details

Outlook Underpinned by Oil Demand Recovery and Energy Projects: Despite the challenging operating conditions caused by the COVID-19 pandemic, WPL was able to report a record annual production of 100 MMboe in 2020, demonstrating the operational strength of its business. However, due to a significant decline in oil prices, the company’s financial performance in FY20 was severely impacted. With the recovery of economies all around the globe and the roll-out of vaccines, the company is witnessing strong oil demand recovery in 2021. Looking ahead, it expects to see strong demand for LNG, particularly from countries in the Asia-Pacific region.

• Developing Two Energy Projects: WPL is currently focused on the development of its two energy projects in Senegal and Scarborough. In Senegal, the company is progressing the Sangomar Field Development Phase 1 and it recently commenced a 23 well drilling campaign at the project. For Scarborough, the company has obtained key regulatory approvals for the development and commercial arrangements of the project. WPL is now targeting to take a final investment decision (FID) for Scarborough in H2FY21.
• Improving Oil and Gas Prices: In the first two-quarters of FY21, the company has witnessed improved sales revenues, mainly driven by the higher average realised prices. The recovery of economies and rebound in demand is the main reason behind the sustained increase in oil and gas prices.

Key Takeaways from Q2FY21 Results:

• Rise in Sales Revenue: For Q2FY1, WPL reported sales revenue of US$1,285 million, up 15% on the previous quarter, underpinned by higher realised prices.
• Decline in Production: Due to scheduled maintenance activities and adverse weather impacts, the production declined by 4% QoQ to 22.7 MMboe in Q2FY21.
• Increase in Sales Volume: During Q1FY21, the company delivered a sales volume of 28.1 MMboe, up 9% from Q1FY21.
• HOA signed with IHI and Marubeni Corporation: In order to investigate the production and export of green ammonia from renewable hydroelectric power in Tasmania, the company has signed a Head of Agreement (HOA) with IHI Corporation and Marubeni Corporation.

FY20 Result Highlights:

• Rise in Production: For FY20, the company reported annual production of 100.3 million barrels of oil equivalent in FY20, up 12% on FY19.
• Rise in Sales Volume: WPL reported an annual sales volume of 106.8 million barrels in FY20, up 10% on FY19.
• Decline in Revenue: Due to lower oil and gas prices, the company’s revenue declined by 26.1% YoY to US$3,600 million in FY20.
• Decline in Bottom Line: For FY20, the company incurred a net loss of US$4,028 million, down from the profit of US$343 million in FY19, impacted by the non-cash impairments and onerous contract provision announced in July 2020.

Production Trend (Source: Analysis by Kalkine Group)

Key Metrics:

Due to the impact of the COVID-19 pandemic and decline in oil and gas prices, the company’s profitability margins were impacted in FY20. Gross margin for FY20 stood at 17.1%, down from 44% in FY19. EBITDA margin stood at 41.2% in FY20, down from 71.8% in FY19, but higher than the industry median of 25.5%. Current ratio for FY20 stood at 2.03x, higher than the industry median of 1.11x.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 14.07% of the total shareholding, while the top four constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.89% and 2.95%, respectively, as also highlighted in the chart below:    

 Source: Analysis by Kalkine Group

Latest Developments:

• Completed Sangomar Acquisition From FAR: Woodside Energy (Senegal) B.V., a subsidiary of WPL, has completed the acquisition of the entire participating interest of FAR Senegal RSSD S.A. (FAR) in the RSSD joint venture, increasing WPL’s participating interest in the RSSD joint venture to 82% and 90% for the remaining RSSD evaluation area.
• Commenced Sangomar Drilling Campaign: In July 2021, the company commenced the drilling campaign for Sangomar Field Development Phase 1. The project remains on track for targeted first oil in 2023.
• Divestment of Kitimat LNG: On 18 May 2021, the company announced that it is divesting 50% non-operated participating interest in the proposed Kitimat LNG (KLNG) development. It is expected that this divestment will allow the company to focus on the successful delivery of higher value opportunities in Australia and Senegal.

Key Risks:

• COVID-19 Uncertainties: WPL is exposed to the risks and uncertainties of COVID-19 pandemic, which could impact the demand and price of oil and gas in the market.
• Supply Chain Disruption: The associated restrictions of the COVID-19 pandemic could create logistics and supply chain issues, which could affect the company’s cost of doing business.
• Foreign Currency Risk: Fluctuations in the foreign currency exchange rates could impact the company’s financial performance.

Outlook: For FY21, the company expects its investment expenditure to be in the range of US$2.9 billion to US$3.2 billion. Notably, the expenditure is focused on the projects in Senegal and Scarborough. The production in FY21 is expected to be in the range of 90-95 mmboe. In line with its focus on maintaining disciplined expenditure, the company has commenced an Operations Transformation program aiming to improve cost efficiency by 30% over the next three years. The company is planning to release its H1FY21 results on 18 August 2021.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: 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.

Stock Recommendation: Over the last three months, the stock has corrected by ~4.71% and is trading slightly below its average 52-week price level range of $16.8 and $27.6, implying opportunity for accumulation. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the stock can trade at some premium to its peers, considering the improved June quarter performance, and rising oil and gas prices. We have taken peers like Cooper Energy Ltd (ASX: COE), Oil Search Ltd (ASX: OSH), Senex Energy Ltd (ASX: SXY). Considering the rise in sales revenue and volume in Q2FY21, continued focus on cost optimisation, recent recovery in oil demand, and valuation, we give a “Buy” rating on the stock at the closing price of $22.020, down by 1.96% as on 28 July 2021.

WPL Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:  

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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