Woodside Petroleum: Wheatstone disappoints

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
23 October 2021, 1:30 PM
Sectors Covered:
Mining, Energy

  • A mixed 3Q21 result, with news of a sizable downgrade to Wheatstone reserves a key highlight.
  • More work is needed to understand the impact of the downgrade, but it is reasonable to assume the material decrease in developed 2P brings forward planned capex spend and shortens Wheatstone’s life.
  • 3Q21 results were mixed but group numbers were close to our estimates.
  • Talks are underway on a possible 40-50% sell-down of equity in Sangomar.
  • We reduce our target price (login to view) for the Wheatstone downgrade, but maintain our Add recommendation.

Mixed 3Q result

A strong performance once again from Pluto was almost enough to offset a weaker quarter from NWS (major maintenance) and Wheatstone (turnaround). Group 3Q21 production of 22.2mmboe was 2% below our estimate, with WPL maintaining 2021 production guidance of 90-93mmboe.

3Q21 sales revenue of US$1,531m was 19% higher qoq, driven by stronger prices, with an average realised price of US$59/boe +28% qoq.

Along with the 3Q21 result, WPL also downgraded Wheatstone reserves; lowering 2P developed reserves from 86mmboe to 26mmboe (-70%) and total 2P reserves from 231mmboe to 168mmboe (-27%). New 4D seismic plus drill results from Julimar-Brunello Phase 3 discovered significantly less gas than previously estimated.

The implications of the results are still being determined by the JV but it is a reasonable assumption that it will shorten the life of Wheatstone while also bringing development capex forward.

In the 3Q21 result WPL outlined that talks around possible Scarborough and Pluto T2 sell-downs are progressing, particularly equity in Pluto T2, which WPL maintains it plans to sell down prior to declaring FID on Scarborough-Pluto T2. FID is still expected to be on track for year end.

WPL also commented that it is in talks with the aim of selling down 40-50% of its equity interest in the Sangomar oil project (Senegal). This would reduce the required capex while also increasing Sangomar’s risk weighting. 

Surprising in the result was the absence of detail on trading activities, which WPL previously commented would be high this half.

Against extreme spot LNG prices, WPL expects spot volumes to increase in 4Q21 to 17%.

Analysis

Wheatstone only represented 13% of our WPL valuation (now 11%), equivalent to a A$0.87ps reduction in valuation. While disappointing, this is not significant enough to undermine our positive view on WPL. 

Meanwhile, any successful sell-down in equity for Pluto T2, Scarborough or Sangomar would likely have an offsetting positive valuation impact of increasing project confidence.

Forecast and valuation update

We have updated our forecasts for the 3Q21 result, including increasing medium-term Wheatstone capex and reducing its assumed life.

Net of these changes our valuation has decreased to (login to view target price).

Investment view

The reserve write-down was a negative, but on a non-core asset. We continue to see attractive value on offer in WPL’s base business, with further upside potential on offer from a potential de-risking of Scarborough and Sangomar in addition to the possible value upside from completing the merger with BHP Petroleum.

Price catalysts

WPL/BHP Petroleum merger (2Q22).

Project equity sell-down and Scarborough FID (year end).

Risks

COVID-related risks to demand for energy resources. Completing BHP merger.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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