Peak Expenditure to Impact Woodside Returns

Australia | Dec 08 2022

Woodside Energy warns of constrained near-term cash flow as it approaches peak capital expenditure for growth plans, and outlines intention to increase gas exposure to ensure longer-term growth. 

-Woodside Energy disappointed with near-term guidance for low production and high expenditure
-The company intends to increase gas exposure as oil-linked contracts expire
-A domestic production decline is expected from 2024, but international production to peak in 2025

By Danielle Austin

Woodside Energy ((WDS)) has treated its recent investor day as an opportunity to update on its growth projects and capital management over coming years as it approaches a peak in its capital expenditure. 

The company intends to increase its long-term exposure to gas hub pricing as oil-linked contracts expire, but near-term growth remains heavily dependent on oil assets. The company intends to lift its gas hub exposure to 30-35% of produced natural gas, from a current 20-25%, from 2027. 

A longer-term production profile through to 2027 has Australian production flat through 2023, ahead of an expected decline in 2024-2026, and international production peaking in 2025. The company anticipates generating free cash flow of US$7-9bn over the next five years, and capital expenditure of $6.0-6.5bn in 2023, which it expects to moderate near $4.0bn in 2024. 

The company is targeting a final investment decision on its Trion oil asset in the coming year, and analysts highlighted approval for the project would imply additional upside to capital expenditure. 

Incremental capital returns unlikely until free cash flow profile improves 

Analysts largely found near-term production guidance low and capital expenditure high, compared to expectations, while the free cash flow profile was reduced. Morgans (Hold, target price $34.50) found 2023 production guidance disappointing, attributing the miss to lower natural gas, pipeline gas and oil volumes, and delays in the start-up of the Sangomar project. The broker also found the “less informative” update to be a step from the company towards being less transparent.

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