Woodside Energy: Announces hefty dividend

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

31 August 2022, 9:00 AM

Sectors Covered:

Mining, Energy

• A solid result from Woodside Energy (ASX:WDS), with earnings beating consensus and coming in close to our estimates.
• Capex guidance for 2022 suggests major second half skew and negative FCF.
• Dividend payout ratio could be cut in the short term unless WDS leverages up.
• After achieving our target price we downgrade our rating to Hold (from Add).

1H22 result

1H22 EBITDA of US$3,971m (vs VA consensus US$4,155m vs MorgansF US$3,736m), was -4% below consensus but +6% above our estimate.

Underlying NPAT of US$1,819m (vs consensus US$1,665m vs MorgansF US$1,775m) meanwhile was 9% above VA consensus and 2% above our estimate.

The strong earnings supported FCF generation of US$2.6bn (vs MorgansF US$2.5bn) and gave WDS the confidence to flex its dividend payout ratio once again to 80% (once you include the accumulated cash that came with the BHP assets).

WDS announced a record US109 cent ordinary dividend.

Analysis

On the result call, a key focus was how long it might be until WDS drops its 80% dividend payout back towards its policy of a minimum 50% payout. To get to that answer we look at WDS’ cash flow, which suggests it might be cutting its payout as soon as this half.

WDS only spent US$998m on capex (including exploration) in the first half, against full year 2022 guidance of US$4,700-$5,300m. This highlights an expensive six months ahead for WDS with a hefty ~US$4bn of second half spend to reach guidance.

With this in mind we estimate WDS will generate negative FCF in the second half of US$300-$400m at an average oil price of ~US$100 per barrel. This leaves us with the view that WDS’ payout ratio might have reached a natural point where it drops back towards the company’s dividend policy, before we consider any risk of oil/LNG price volatility.

This pace of spend is unlikely to show any signs of slowing over the coming two years with capex peaking. 

Of course, WDS might disregard this balance and rely on external capital to sustain an elevated dividend profile. In the past we have certainly seen WDS draw down on debt while paying out large dividends – which appears an inefficient use of capital until you realise how yield-hungry the ASX has become.

On its growth projects:

1. At Scarborough, no update on a selldown besides WDS commenting it was not a “fire sale” process (perhaps a signal that a deal appears less likely?) with first gas in 2026.
2. At Sangomar, the final stage of FPSO construction will move from China to Singapore (which seemingly puts stress on the budget/schedule although WDS flagged that the reverse was the result given current COVID risks in China), first oil is still expected in 2023.

Forecast and valuation update

Minor changes to our estimates, increasing 2H22 capex. Our 2022 capex estimate (including exploration) is now US$5.1bn (from US$4.7bn). While also adjusting net debt and rolling forward our model.

Our target price is revised to (login to view).

Investment view

WDS’ share price has increased 79% over the last 12 months. So while our positive view on WDS as a business remains unchanged, our conviction in our investment view has gradually declined.

With WDS now achieving our target price, we downgrade our recommendation to Hold (from Add).

Risks

• Downside: Scarborough/Sangomar execution risk. Macro risk (oil and gas demand drivers).
• Upside: Oil/LNG price upside as we head into northern hemisphere winter.

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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.