Woodside Energy: Caps off solid first half

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

21 July 2022, 9:00 AM

Sectors Covered:

Mining, Energy

• A solid 2Q22 operational result from Woodside Energy (ASX:WDS), with production and sales in line.
• Potential for capital management in August from the heavy FCF generation.
• Maintain Add rating with (login to view) target price.

2Q22 recap

2Q22 group production of 33.8mmboe, +60% on the previous quarter (qoq) on the 1 June completion of the merger with BHP Petroleum.

Sales revenue in 2Q22 of US$3,606m (vs MorgansF US$3,436m) was +44% qoq.

Guidance for 2022 that includes the BHP assets was given for the first time. WDS set group production at 145-153mmboe (~50% LNG), which looks weak versus the range of consensus expectations.

Interesting in the result WDS commented its attempt to sell down equity in Scarborough was “progressing”. Disappointingly WDS admitted it was “ending” its sell down in its Senegal greenfield oil project Sangomar.

WDS expects to be in a position to sanction (FID) the Trion field in the Gulf of Mexico (GoM) in “2023”, which sits well behind BHP’s timeframe for mid-2022 and is indicative of how little work WDS has been able to do on the project pre-1 June.

WDS also flagged a duster at Wildling project (GoM) with well SJ101, and outlined that it would not pursue development of the Wildling field.

Analysis

We estimate WDS will generate ~US$2bn of FCF in 2022. This is well north of our estimates from earlier in the year where we expected marginal FCF generation. This supplies ample ammunition to support capital management if WDS chooses to flex its shareholder returns.

Importantly Scarborough and Pluto T2 remain on schedule and budget, although preventing a material blowout in our view will be difficult given the technical difficulty of the project and current inflationary environment in WA.

Reducing WDS’ equity in Scarborough would be a real positive, given the majority of risk sits upstream and the magnitude of capex. We await further updates.

Disappointing in the result was WDS’ decision to reduce the amount of detail it reports (e.g. revenue per product per asset) and reporting the same day as Santos (STO).

Forecast and valuation update

With the BHP-P merger completed on 1 June 2022, but having an effective date of 1 July 2021, we had expected WDS to book the full production for the 12 months of 2022.

Instead WDS guidance has outlined it will only recognise production and sales from 1 June, while still receiving operational cash flow from the BHP assets for the full year (through a ~US$1.1bn cash payment from BHP to cover the accumulated cash flow since the 1 July 2021 effective date).

We have reduced the pace of spend at Scarborough/Pluto T2 to keep our 2022 capex estimates in line with guidance.

Net of these changes our valuation is revised to (login to view).

Investment view

WDS boasts high quality earnings (EBITDAX margin >70%), robust balance sheet (gearing ~9%), high dividend yield (c10%), and a portfolio of growth projects in Australia, GoM, Senegal, and Trinidad & Tobago.

While oil and LNG prices will eventually peak and cycle, we see the cumulative cash flow to be produced by the merged business as outweighing WDS’ current share price. We maintain our Add rating with a revised (login to view) target price.

Price catalysts

• Half-year earnings and dividend result on 30 August.
• 3Q22 operational result on 20 October.

Risks

• Execution risk on growth projects.
• COVID-related risk to global and regional energy demand.

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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.