Company Overview: Woodside Petroleum Ltd (ASX: WPL) is a leading natural gas producer focused on providing affordable energy solutions. The company runs a robust hydrocarbon business and operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO. WPL is recognised for its world-class capabilities as an integrated upstream supplier of energy. The company was listed on ASX on 18 November 1971.

WPL Details

H1FY21 Results Supported by the Recovery in Demand for LNG and Oil:  Due to strong rebound in market conditions, and recovery in demand for LNG and oil, Woodside Petroleum Ltd was able to report improved financial results for H1FY21. Major Highlights of the results are as follows:

• Rise in Operating Revenue: Operating revenue for H1FY21 stood at US$2,504 million, up 31% on the previous corresponding period (pcp), driven by higher realised prices.
• Increase in Sales Volume: Due to the increased trading activity in response to favourable market conditions, WPL’s sales volumes increased by 6% YoY to 53.9 million barrels of oil equivalent (mmboe) in H1FY21.
• Rise in Free Cashflow: During H1FY21, WPL generated US$1,318 million of cash flow from operating activities and delivered positive free cash flow of US$311 million, up 18% on pcp.
• Rise in NPAT: Statutory NPAT for H1FY21 stood at US$317 million, up 108% on pcp.

Statuary NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross Margin for H1FY21 stood at 39.3%, up from 7.2% in H1FY20. EBITDA margin for H1FY21 stood at 57.3%, up from 37.6% in H1FY20. ROE for H1FY21 stood at 2.6%, up from -28.3% in H1FY20. Current ratio for H1FY21 stood at 2.67x, slightly up from 2.65x in H1FY20.

Profitability Metrics and Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 14.08% of the total shareholding, while the top four constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.89%  and 2.95%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Progressing the Development of Energy Projects: Currently, WPL is focused on the development of its two energy projects in Senegal and Scarborough. Over H1FY21, WPL made significant progress towards the targeted final investment decision (FID) for Scarborough and Pluto Train 2 developments. In Senegal, the company is progressing the Sangomar Field Development Phase 1 and it recently commenced a 23 well drilling campaign at the project. WPL recently launched the sell-down process for up to 49% of Pluto Train 2.

Signed Merger Commitment Deed with BHP Group: WPL recently entered into a merger commitment deed with BHP Group to combine their respective oil and gas portfolios. Under the transaction, BHP’s oil and gas business would be merged with WPL and WPL would issue new shares to BHP shareholders. The proposed merger is subject to confirmatory due diligence, negotiation and execution of full form transaction documents. Further, it also requires approval from shareholders and regulators. Major strategic and financial benefits of the proposed merger are as follows:

• The combined oil and gas business of BHP and WPL would enjoy the greater scale and diversity of geographies, products, and end markets.
• The BHP and Woodside assets together could unlock synergies optimising corporate processes and systems.
• The merger would provide financial resilience to help supply the energy needed for global growth and development over the energy transition.

Key Risks:

• COVID-19 Uncertainties: WPL is exposed to the risks and uncertainties of COVID-19 pandemic, which could impact the demand and price of oil and gas in the market.
• Supply Chain Disruption: The associated restrictions of the COVID-19 pandemic could create logistics and supply chain issues, which could affect the company’s cost of doing business.
• Foreign Currency Risk: Fluctuations in the foreign currency exchange rates could impact the company’s financial performance.

Outlook: If the proposed merger of WPL and BHP is completed, it could create the largest energy company listed on the ASX with high margin oil portfolio, and long life LNG assets. Further, the combined business has the potential to realise synergies of more than US$400 million (100 per cent basis, pre-tax) per annum from optimising corporate processes and systems. Looking ahead, WPL is focused on cost and efficiency transformation and achieving targeted Scarborough FID in H2FY21. For FY22, the company expects its investment expenditure to be in the range of US$2,900 – 3,200 million. Further, the company expects the FY21 production volume to be between 90 – 93 MMboe.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 14.52% and is trading lower than the average 52-week price level band of $16.8 and $27.6. The stock has been valued using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). The company can trade at slight discount to its peers, considering the uncertainty surrounding the COVID-19 pandemic, and risks associated with the fluctuations in the oil and gas prices. For the purpose of valuation, few peers like Santos Ltd (ASX: STO), Oil Search Ltd (ASX: OSH) and Senex Energy Ltd (ASX: SXY) have been considered. Considering the company’s improved financial performance in H1FY21, decent progress in Scarborough and Pluto Train 2 developments, expected strategic and financial benefits from the proposed BHP merger, current trading level, and valuation, we give a “Buy” rating on the stock at the current market price of $19.590, as on 1 September 2021, 11:10 AM (GMT+10), Sydney, Eastern Australia.

WPL Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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