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Subdued 2020 For Woodside Petroleum

Australia | Apr 17 2020

Woodside Petroleum has a well-financed balance sheet, able to withstand the current collapse in oil prices, but 2020 is likely to be a subdued year for the oil & gas business.

-Reduced capital expenditure target reiterated
-Moves to hedge oil output
-Can defer growth until market improves

 

By Eva Brocklehurst

Woodside Petroleum ((WPL)) has taken a defensive stance for the rest of 2020, reducing expenditure and deferring large projects. While the company appears to be well financed to withstand the slump in oil prices, as Shaw and Partners suggests, a few weeks is a long time in the oil market.

The company has reiterated full year production guidance for 97-103 mmboe and is yet to feel the full impact of lower oil prices, given the three-month lag in LNG contracts. Credit Suisse assesses the collapse in oil prices will be observed in the June quarter and even more so in the September quarter. LNG spot prices have declined closer to US$2/mmBtu.

Shaw and Partners suspects the worst is yet to come, with Brent at less than US$30/bbl and little that OPEC and associates can do to stabilise market. There is yet to be shutdowns forced on oil companies by customers that cannot take any more crude.

Woodside has reiterated a reduced capital expenditure target of US$1.7-1.9bn for 2020. Final investment decisions on Scarborough and Pluto T2 projects have been delayed until 2021, while a final decision on Browse has been delayed indefinitely.

Shutdowns for maintenance on the North West Shelf trains 3 and 4 are now expected in the September quarter 2020 and June quarter of 2021, respectively. Total production in the March quarter was down -6%, with North West Shelf LNG and WA oil production affected by a cyclone. Hot weather and reliability issues affected Pluto LNG and Wheatstone.

Woodside is now only providing a single LNG realised price across its three assets. Morgan Stanley is not pleased with this, believing it creates uncertainty about the revenue being generated by each asset, particularly at a time when price reviews are underway.

Debt Covenants

Woodside can withstand oil prices as low as US$10/bbl in FY20, Credit Suisse calculates, and US$15/bbl through 2021, without its debt covenants coming into risk territory.

The company has indicated its debt covenants centre on gearing, currently at 14%, which would have to increase to more than 70% for these to be breached. Morgans points out the current slump in oil prices has come at a fortunate time, in that Woodside is between expenditure cycles.

The company has entered a 7.9mmboe call option at the cost of US$37m, providing downside protection and upside exposure should prices move back through US$40/bbl in the second half of 2020.

Morgans believes the quick move to hedge 2020 output and fix some LNG volume will build a defendable base of profitability, even if energy prices continue to fall. However, if the company pursues a large-scale acquisition then the strength of its balance sheet may come under question, Credit Suisse points out.

Macquarie also questions whether the dividend may come under pressure after 2020 at current spot prices, while UBS believes Woodside Petroleum is likely to pay a dividend in 2020 and continue to generate a profit.

Growth Outlook

Pipeline construction will start for the interconnector to the North West Shelf, which Credit Suisse assesses is high-margin and under appreciated by the market. Still, joint venture approval is required and progress may be stymied as a result. The broker values the interconnector up to $2.40 a share, unrisked.

Woodside is resilient to oil price weakness compared with its peers as there are options to defer growth until the market improves, and high-margin growth can be pursued even amidst lower prices, in the broker's view. Morgans agrees some growth projects can be deferred and also assesses the relative strength could mean Woodside can opportunistically acquire business during the down cycle.

Shaw suggests the March quarter will likely turn out to be the best of what could be a very poor year. The broker also found few details from the update on the situation in Asian LNG markets, one key area of concern. Morgan Stanley, too, believes that, unless oil recovers to US$50/bbl LNG, the growth outlook is challenged. Moreover, the company faces declines at existing assets.

Shaw, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $28 target. The database has five Buy ratings and two Hold. The consensus target is $24.41, suggesting 14.1% upside to the last share price. Targets range from $21.60 (Morgan Stanley) to $27.16 (Credit Suisse).

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