Woodside Energy: Deal greatly enhances fundamentals

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

31 May 2022, 10:00 AM

Sectors Covered:

Mining, Energy

• We have merged our Woodside Energy (ASX:WDS) and BHP-Petroleum models, adjusting our estimates for the new combined business.
• New WDS shares start trading on 2 June.
• In valuation terms we view the merger as broadly value neutral, although we also see it as greatly enhancing WDS’ fundamentals: a) larger earnings platform, b) much needed geographical and commodity diversification, c) upgraded growth portfolio, d) strengthened balance sheet and e) ammo for shareholder returns.
• The rising earnings profile has also benefited from the material upcycle in oil and LNG prices, fuelling our expectations for WDS’ dividend profile.
• We maintain our ADD rating with a revised (login to view).

A new look Woodside

Post the merger, WDS transitions from being a WA-centric LNG producer facing shrinking group production, capital-intensive growth options and gearing already of 24%, into now being a global diversified oil, gas and LNG producer (roughly doubling in size), with a greatly enhanced growth portfolio, and strengthened balance sheet (gearing dropping from 24% to 13%).

The deal metrics highlight a reasonable outcome for both sides, while not a bargain in our view. We believe WDS can digest the valuation being paid for the BHP assets and start to unlock further value from the BHP portfolio, particularly in the Gulf of Mexico (GOM) and Trinidad & Tobago.

Importantly, WDS also moves from key project Pluto accounting for 64% of its group valuation to a much healthier 36%. While its Australian-based assets moves from 96% of our valuation to 64%.

We also see BHP’s growth assets as also diluting the significance of the risk around any potential budget/schedule slip at Scarborough and Pluto T2.

Analysis

A well-timed deal enlarging WDS’ earnings at a time of active investment in new growth. WDS had already expected to protect its shareholder returns post merger, however the earnings growth delivered by the cycle has now positioned the company also for a potential buyback and/or special dividend at its August result. 

It will be interesting to see where market expectations of value on WDS settles post-merger. We were encouraged by the strong valuation (vs MorgE/consensus) the Independent Expert’s Report placed on BHP’s GOM operations at Shenzi, Mad Dog and Atlantis.

Each of these projects holding +1 billion barrel resources with a long list of high value tie-back options.

Forecast and valuation update

We have made extensive changes to our WDS model, effectively merging the existing business with BHP Petroleum. A summary of our new estimates is provided within this report.

Post the acquisition, and issue of new WDS shares, our valuation-based target price is little changed at (login to view).

Investment view

Post the merger with BHP Petroleum we maintain our Add recommendation with a (login to view) target price.

We view WDS as ideally positioned to generate high quality earnings, maintaining its leverage to the continuing upcycle in oil & gas, tackle its diversified growth profile to unlock more value upside and potentially deliver a shareholder return surprise at its next result.

Price catalysts 

• Half year result (11 August).
• Progress on growth projects Sangomar/Scarborough/Trion.

Risks

• COVID related risks to global energy resource demand drivers.
• Execution risk on key projects.

Find out more

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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.