Woodside Petroleum: Woodside in the right place at the right time
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 19 August 2021, 1:30 PM
- Sectors Covered:
- Mining, Energy
- Ahead of the 1H21 result, WPL/BHP Petroleum announced their agreed merger.
- We believe Woodside Petroleum (ASX:WPL) has benefited from being in the right place, at the right time. With: 1) BHP/WPL having an existing relationship, 2) BHP eager to boost its ESG profile, and 3) WPL being a quality operator (safe hands which is important for BHP).
- From an economic standpoint we think WPL is clearly getting the better of the deal, with synergies not baked into deal metrics and BHP willing to accept a discount.
- Meanwhile WPL posted a mixed 1H21 result, with EBITDAX inline while underlying NPAT fell short of our estimates.
- We maintain our ADD rating, with recent weakness pushing WPL to a discount.
1H21+ New CEO
1H21 EBITDA of US$1,475m was inline (vs US$1,496m MorgansF), while underlying NPAT trailed at US$354m (vs US$401m MorgansF). 1H21 was healthy, but WPL flagged additional expenses on the way for 2H21 (both opex and capex).
We were disappointed by the cost guidance, with 2021 production costs US$450- $550m and G&A of US$150-$200m, both inline, while substantial trading costs of US$1,100-$1,300m were also revealed. We are keen to look at WPL’s trading activities in greater detail post reporting season, but trading volumes look set double in 2H21, in addition to the onerous contract expenses at Corpus Christi.
WPL also narrowed 2021 production guidance to 90-93mmboe from 90-95mmboe (vs 92mmboe MorgansF). Spot volumes are expected to remain 10-15% in 2021.
The slight earnings miss led to lower than expected interim dividend of USD 30cps (vs 34cps MorgansF). With WPL maintaining its elevated payout ratio of 80%.
Along with the 1H21 result and merger agreement news, WPL also announced that acting CEO Meg O’Neill would take on the top role permanently. In our view a good choice given Meg’s experience and knowledge of WPL.
Merger with BHP Petroleum
Rather than embarking on a multi-year asset-by-asset sale process of its large petroleum business, to maximise the value it is receiving for its petroleum assets, BHP has opted for the quick and simple route of merging with petroleum business with WPL.
From WPL’s perspective the deal is transformative, hoisting WPL into being a top 10 global E&P with +2 billion barrels of 2P reserves, with EBITDA of US$4.7bnpa and growth options.
We believe the 52/48 WPL/BHP Petroleum split of the agreed merger favours WPL, who is acquiring BHP’s Petroleum business at a 5% discount (so far) to our US$14.5bn valuation on BHP Petroleum, before even taking into account the expected US$400mpa of synergies.
Beyond value and earnings accretion delivered by the merger, WPL will also gain geographical spread from absorbing BHP’s global petroleum business. This includes WPL picking up BHP’s growth assets (including Trion and Shenzi growth).
In our view the positives are clear, while some of the smaller negatives include a put option on Scarborough that would see WPL likely have to pay BHP US$1bn in 2H22 if they are not merged, and sizeable rehab liabilities on aging BHP operations like Bass Strait.
WPL management were quick to stress that it did not expect any material barriers to the merger going ahead, while also pointing out that the rehab at Bass Strait would be stretched over a long period and still a long way off with Bass Strait still a major cash flow producer.
Forecast and valuation update
Post the 1H21 result and 2021 guidance, we have increased opex assumptions for 2021-23 to better accommodate the onerous contract expense at Corpus Khristi. We have also lifted 2022-23 G&A inline with WPL 2021 guidance.
Post these changed our target price declines to (login to view).
Post the merger news and recent share price weakness we gain more conviction in our ADD rating on WPL. With long-term upside looking appealing.
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