Company Overview: Woodside Petroleum Ltd (Woodside) is an oil and gas company. The Company is engaged in hydrocarbon exploration, evaluation, development, production and marketing. It operates in three segments: Producing comprising North West Shelf (NWS) Project, Pluto Liquefied Natural Gas (LNG) and Australia Oil; Development comprising Browse floating liquefied natural gas (FLNG) and Wheatstone LNG, and Other. Its Other segment comprises trading and shipping activities and activities undertaken in the United States, Canada, Senegal, Myanmar and other international locations. Its North West Shelf Project is engaged in the exploration, evaluation, development, production and sale of liquefied natural gas, pipeline natural gas, condensate, liquefied petroleum gas and crude oil from the North West Shelf ventures. Its Pluto LNG project is engaged in exploration, evaluation, development, production and sale of liquefied natural gas and condensate in assigned permit areas.


WPL Details

Better Than Expected Financial & Operational Performance in FY18: Woodside Petroleum Limited (ASX: WPL), is a leading integrated player in LNG space that has produced a significant percentage of the global supply of LNG. The company has an experience of >30 years for operating LNG production in Western Australia (WA), Australia. The company possesses a global portfolio, and it is known for its world-class capabilities as an integrated upstream supplier of energy. The company is currently developing Scarborough and Browse gas resources. The company holds significant equity stakes in Senegal, Myanmar, Canada (Kitimat) and Timor-Leste. As of March 13, 2019, the company is having the market capitalization of ~$32.73 billion. For FY 18, the company has reported 28% growth in the NPAT to $1,364 million, 32% rise in the operating revenue to $5,240 million, and 83% increase in the free cash flow to $1,524 million compared to the previous year. In Q4 FY 18, the company posted a 43% growth in the sales revenue to $1,419 million and posted a 10% rise in the production to 24.1 Million Barrels of Oil Equivalent (MMboe). As a result, the company achieved 8% YoY increase in the production during the full year 2018 to 91.4 MMboe. The company posted higher sales revenue on the back of higher realized prices, along with the rise in sales volume. As the exploration activities phased out in a planned manner, the company reported 49% lower exploration expense during the second half of 2018 versus the first half of the year. WPL’s gross margin rose by 21% to $28.8 per barrel of oil equivalent during 2018 due to high price realized as well as due to strong gross margin of 56% for Pluto LNG and of 55% for the North West Shelf Project.

In a nutshell, we expect that the company would be helped by decent liquidity position, active management of debt portfolio and by the growth in its free cash flow. Also, the company’s ROE has witnessed YoY improvement of 1.3% to 8.4% in FY 2018 which clearly depicts that the company is focused on providing decent shareholder value. This can also increase traction towards the company’s stock moving forward.


FY18 Financial Highlights (Source: Company Reports)

Delivery of Near-term Growth: Woodside Petroleum executed great result at Greater Western Flank Phase 2 which gave results six months ahead of schedule and was even $630 million under the total budget of the project. With respect to Wheatstone, production from LNG trains 1 and 2 had surpassed the expectations and the construction of domestic gas plant got wrapped up in Q4 2018. During the year, the company achieved numerous significant milestones in its plans to develop Scarborough and Browse fields off Western Australia through its world-class facilities on Burrup Peninsula. With respect to Senegal, the company assumed operatorship of SNE development and started FEED activities. It has also received approval of SNE development Environmental and Social Impact Assessment.

Higher Margins Compared to Industry Median: Woodside Petroleum happens to be in a sound position with respect to its key margins. The company’s net margin stood at 28% in FY 2018 which is comfortably higher than the industry median of 13.9%, demonstrating the company’s improved capabilities to convert its top line into bottom line when compared to the broader industry. Also, its operating margin for FY 2018 stood at 43.5% which is significantly higher than the industry median of 24.7% which highlights the company’s cost-effective strategies.

The company’s current ratio stood at 2.31x in FY 2018 which is higher than the industry median of 1.19x reflecting that the company possesses decent liquidity position. We expect that the decent liquidity position will support to meet its short-term commitments and provide sufficient headroom for future growth.  

Reduced the Overall Cost: During FY18, WPL had reduced the overall unit cost of the production to US$5.1 per barrel of oil equivalent. This is despite the rise in expenses due to the starting of Wheatstone LNG Train 2 and despite the planned suspension of operations at Ngujima Yin FPSO. Excluding Wheatstone, the company’s unit production costs across all its products were $4.90 per barrel of oil equivalent and the company is now targeting to improve the Wheatstone production costs which have delivered better than expected production from its both trains. In FY 18, Pluto and NWS LNG unit production cost was of $3.6/boe and the company had reduced 8% of the Pluto LNG unit cost. The company added that technology also happens to be a key enabler when it comes to maintaining and growing a resilient portfolio. The company has also refreshed its technology strategy in order to ensure the continued focus on conventional oil and gas technologies while adding 2 new priorities like carbon management and the development of new energy sources.
 

Production Cost (Source: Company Reports)

Scenario for Debt Portfolio: WPL is preparing the debt portfolio for growth and it had reduced the gearing to 12%. This has been achieved on the back of early redemption of a ten-year 144A unsecured bond of $600 million and also due to the cancellation of multiple bilateral facilities amounting to $700 million. The company ended 2018 with net debt amounting to $2,397 million and a strong liquidity position of $3,918 million. The company continues to actively control its debt portfolio by minimizing the near-term maturities and maintaining a lower cost of debt. The average term to maturity happens to be 4.7 years and the company’s portfolio cost of debt remains competitive at 3.9%.


Debt Maturity Profile (Source: Company Reports)

Priorities for 2019: For Scarborough and Pluto LNG Train 2, WPL will be working through the FEED activities for the preparation of the targeted final investment decisions (FID) early next year. For Browse, the company plans to execute binding gas processing agreements and plans to start FEED ahead of the targeted final investment decision in late 2020. With respect to Wheatstone, the company expects to start domestic gas production in 2019. The company’s plans for Burrup Hub would more than double WPL’s equity LNG production by 2027 which would provide long-term gas supplies for both domestic and export markets and would deliver significant benefits to the shareholders and community.

Guidance for Investment Expenditure & Production: The company has reaffirmed its guidance for investment expenditure for 2019 and expects it to be in the range of $1.6 billion to $1.7 billion and expects the production for the year 2019 to be in the ambit of 88 to 94 million barrels of oil equivalent. Meanwhile, for FY 19, the projected impact on NPAT is $30 million due to a $1 movement in the Brent oil price, and $6 million due to a $0.01 movement in the AUD/USD exchange rate. The company plans to have major turnarounds for Goodwyn A Platform and LNG train 1. WPL is anticipating a return to the market for long term contracts as buyers are projecting tightening of supply. The continued robust growth with respect to LNG demand from China and South East Asia is contributing to this market shift with over half of the LNG contracted on long term basis in 2018 being from the projects that are yet to be sanctioned. Moreover, the YoY growth in WPL’s free cash flow of 83% in 2018 has aided the company’s robust financial liquidity throughout the year and this positions it well to deliver the growth projects.
 

2019 Guidance (Source: Company Reports)

Stock Recommendation: Woodside Petroleum had reinforced its robust balance sheet and it reduced its gearing to 12% which happens to be within its 2018 target range of 10-30%. The company has been actively controlling its debt portfolio by minimizing near-term maturities and maintaining a low cost of debt and, we expect, that this would support it over the long-term in tapping the growth opportunities. The company has restructured the debt portfolio in 2018 so that the interest expense incurred is minimized. Also, we expect that the company’s strategy to deliver superior returns to the shareholders throughout three distinct time horizons which might attract the attention of the market players. The time horizons are characterized by the cash generation (2017-2021), unlocking value (2022–2026) and repeating the successes (2027+). Because of low cost and high margin producer, the company happens to be uniquely positioned as a global LNG market rebalances and grows into the future.

Apart from the above factors, the company’s stock has delivered the return of 14.66% on a YTD basis and, in the span of the previous three months, it posted the return of 10.60%. These decent returns also support the long term view on the stock at the current price.

From the valuation perspective, the company’s stock has its P/B ratio at 1.3x while the industry median (Oil & Gas) stood at 1.6x. The company has lower than industry EV/Sales multiple of 5.3x as compared to the industry median of 23.3x showing the undervalued scenario. Given the backdrop of aforesaid facts and decent outlook, we give a “Buy” recommendation on the stock at the current market price of A$34.510 per share (down 1.287% on 13 March 2019).

 
WPL Daily Chart (Source: Thomson Reuters)

 
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