Woodside Petroleum: Merger late but worth the wait

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
18 February 2022, 8:30 AM
Sectors Covered:
Mining, Energy

  • Underlying NPAT beat consensus by +18%, while +3% above Morgans estimates.
  • BHP merger expected to be completed in early June, after a 19 May vote.
  • There is some uncertainty around whether WPL will pullback the payout ratio to 50% from 80% during its next capex phase.
  • Woodside Petroleum (ASX:WPL) would FID Sangomar even without a selldown.
  • Share price starting to gain ground after trading sideways for 12 months, we still see further upside to our (login to view) target price and maintain our Add rating.

Solid FY21 result

WPL posted FY21 underlying NPAT of US$1,620m (+262% pcp), close to our estimate of US$1,568m but beat consensus of US$1,412m by a handsome +18%.

While underlying EBITDA of US$4,135m (+115% pcp) was inline with consensus (US$4,145m) it trailed our estimate of US$4,366m. Still, a good overall cost performance in 2H21 with EBITDA below our estimate due to “other expenses”. 

A healthy final dividend of US$1.05ps was announced (vs consensus US$1.07ps vs MorgE US$0.94ps). 

WPL plans to hold the shareholder vote on the BHP merger on 19 May, with merger completion then expected in early June 2022.

Analysis

While merger completion is still ~4 months away, we maintain the conviction view that this transformative deal will vastly enhance WPL’s fundamentals and represents material valuation upside risk to current consensus.

It will be interesting to see how quickly WPL sinks its teeth into BHP’s growth assets, especially with its large Trion field in the southern Gulf of Mexico due for FID around mid-2022. 

WPL had previously hinted that its dividend payout ratio would likely drop back to 50% during its next capex phase. However, with the BHP merger approaching there are divided views on whether WPL will reduce its payout ratio from 80% or not.

While we still expect WPL to pullback its payout ratio, this is far from certain given WPL has shown in the past an appetite for allowing gearing to grow while paying out the majority of earnings. While we do not agree with this approach, there has been little doubting the positive share price effect that a high dividend yield brings. 

As was the case with Scarborough, WPL outlined that it does not need to selldown its 82% interest in Sangomar in order to sanction the project. While we will have to see how WPL’s balance sheet handles the capex load, this might be the base case given the difficulty WPL has had in securing a deal for either asset.

Forecast and valuation update

Only minor adjustments to our forecasts post the FY21 result, and roll forward of our model. Our valuation has been updated to (login to view).

Investment view

The recent rise in WPL’s share price has, in our view, been the unfolding of a ‘catch up’ re-rating. Something we have been expecting since WPL/BHP announced the merger and Brent oil pushed through $80/bbl.

We expect WPL to make further ground on our (login to view) target price, which still faces further upside risks as the merger progresses and upcycle extends. We maintain our Add rating.

Price catalysts

  • BHP merger vote 19 May, and deal completion in June 2022.
  • Progress on growth projects (in particular on Scarborough).

Risks

Risk of merger completion. COVID risks to operations and energy demand.

Find out more

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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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.

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