Australia | Jul 16 2020
Weak LNG prices and asset impairments have prevailed, yet Woodside Petroleum remains committed to its growth plans.
-Strong operations in June quarter overshadowed by weak prices
-Downside risk to dividend payout-out levels
-Strategic options at North West Shelf moving in Woodside's favour
By Eva Brocklehurst
Price realisation in the June quarter was always going to be problematic for Woodside Petroleum ((WPL)) and the company's production update confirmed this was the case. Moreover, the company has announced -US$3.92bn in asset impairments will be included in the interim result on the back of lower pricing assumptions.
However, Ord Minnett asserts this is rather irrelevant because investors are likely to have their own price forecasts and the strong operating performance in the June quarter has been overshadowed by weak realised prices and asset impairments.
Sales volumes were strong and well above production levels. The main negative was a low LNG realised price of US$5/mmbtu, which meant revenue of US$768m was down -29% on the prior quarter.
Morgans agrees, despite the large changes to energy price assumptions and write-downs, there is no apparent change to Woodside's growth strategy. Sales volumes of 27.1mmboe compared favourably to the broker's estimates and operations was steady at Pluto, North West Shelf and Wheatstone.
The main risk is the balance sheet, given the growth projects. The company has indicated gearing as of June is expected to be 19%, which Ord Minnett calculates implies US$2.7bn in net debt against an asset base of US$13bn.
Morgans had expected significant write-downs given the stark difference between previous cycles in the current price environment, considered to be partially structural. Woodside has reduce the carrying value of its existing oil & gas properties by -US$2.76bn and exploration/evaluation assets by -US$1.16bn.
The impairment disclosures have led Citi to cut its valuation by -14% such that growth is now necessary to become more positive. This will require both patience and flawless execution, the broker adds, downgrading to Neutral/High Risk from Buy/High Risk as a result.
Credit Suisse, on the other hand, believes the stock's resilience to low oil prices and the upside potential is under appreciated by the market although acknowledges patience until 2022 may be required.
US LNG impairment risks are getting larger, the broker notes, with the announcement of the Corpus Christi LNG provision of -US$447m. Still, Credit Suisse considers it premature to crystallise a long-term US LNG position as out of the money.
The broker considers other write-downs at North West Shelf and Sangomar could facilitate Woodside ambitions regarding M&A, anticipating Woodside would re-rate upon any acquisition of a further North West Shelf stake.
In contrast, Citi is reluctant to give Woodside the benefit of using its balance sheet for accretive M&A, fearing the Burrup hub will not work at a price deck that is more conservative than US$65/bbl oil and US$8/mmbtu LNG.
Dividends
The company has confirmed positive underlying net profit in the first half but remains unsure about actual dividends, waiting to see how oil markets hold up over coming weeks before a definite decision is made. Management has pointed out that while an 80% pay-out has been customary its actual dividend policy is for a 50% pay-out.
Hence, Credit Suisse suspects there is some downside risk to the dividends from prevailing levels. Morgans, too, envisages potential for Woodside to pull back to a 50% pay-out.
Growth Projects
There has been conjecture over growth plans, although management appears committed to backfilling North West Shelf with an expanded Pluto LNG facility via Scarborough and the Karatha gas plant via Browse (Burrup hub).
Morgans was surprised that the company still intends to move ahead with unchanged growth plans, which includes potentially lower-returning projects such as Browse. The CEO expects a Browse tolling agreement will only be completed once JV partners have either exited or committed. Hence, a final decision has been pushed back to 2023.
Management is confident Scarborough will proceed, although appears to indicate higher prices or lower capital expenditure may be required. Morgan Stanley suspects, at current prices, Scarborough would not cover its cost of capital.
However, Credit Suisse interprets a potential change of development concept is possible, and an alternative scenario of Pluto T1 backfill/interconnector is increasingly likely, which would offer lower capital expenditure.
The broker envisages material upside from growth at Scarborough/interconnector and Woodside could emerge as a winner from the shake-up in ownership stakes at North West Shelf. Macquarie agrees the strategic options are developing in Woodside's favour. While Chevron has indicated it is looking to exit the JV this could delay project development unless a sale is completed quickly, Ord Minnett points out.
UBS maintains its valuation based on the vision for the Burrup hub, expecting Woodside will pursue this option while also considering a tolling agreement between the North West Shelf and Scarborough. Still, the broker notes the market is cautious and questions the need for a new LNG liquefaction facility at Pluto when North West Shelf ullage (shortage) is due to emerge in late 2021/22.
Goldman Sachs expects LNG spot prices will rebound and assumes a long-term price of US$7.25/mmbtu. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, maintains a Buy rating with a target of $33.70 and factors in a long-term oil price of US$60/bbl.
Goldman Sachs believes Woodside is well-positioned compared with its ASX peers to ride out the low oil price environment and invest in future growth. The database has four Buy ratings and three Hold. The consensus target is $23.76, suggesting 14.4% upside to the last share price.
See also, Subdued 2020 For Woodside Petroleum on April 17, 2020.
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