Company Overview: Woodside Petroleum Ltd (ASX: WPL) is an oil and gas exploration and production company that holds interests in gas projects in Western Australia including the Northwest Shelf, Wheatstone, Pluto and Scarborough, and other global interests. The company runs a robust hydrocarbon business and operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO. The company was listed on ASX on 18 November 1971.

WPL Details

Progressing Merger with BHP Group: On 22^nd November 2021, WPL notified that it has signed a binding share sale agreement (SSA) with BHP for the merger of BHP’s oil and gas portfolio with WPL. As per the agreement, WPL is going to acquire the entire share capital of BHP Petroleum International Pty Ltd (BHP Petroleum) in exchange for new Woodside shares. This merger is expected to create a global top 10 independent energy company with a high margin oil portfolio, long life LNG assets. Some of the key highlights of the merger are as follows:

• On completion of the merger, WPL will issue new shares which are expected to comprise approximately 48% of all WPL shares (on a post-issue basis) as consideration for the acquisition of BHP Petroleum.
• The transaction is expected to be completed in the second quarter of the 2022 calendar year.
• The merger of BHP’s petroleum business with WPL is expected to create annual synergies of more than US$400 million.
• On 16 December 2021, Australian Competition & Consumer Commission (ACCC) notified that it will not oppose the WPL’s proposed acquisition of BHP Petroleum International Pty Ltd. The regulatory is of the view that post-acquisition, WPL would continue to face competition from a range of suppliers of domestic gas.

2021 Investor Update Highlights: On 8^th December 2021, WPL provided an update on its strategy and value proposition in a virtual event, wherein, the management informed that the company has set a new target of investment US$5 billion in emerging new energy markets by 2030.

• In line with its goal of creating value for its shareholders, WPL has announced the proposed merger with BHP’s petroleum business and has taken the final investment decisions for Scarborough and Pluto Train 2.
• WPL is continuing with the sell-down process for a portion of 82% equity in Sangomar and is targeting an equity position of between 40% and 50% for this project with near-term oil production.
• The company’s strategy is to invest in new energy projects, which will provide additional diversity and increase the resilience of the business.

Q3FY21 Result Highlights: During the quarter ending 30 September 2021 (Q3FY21), WPL executed significant scheduled maintenance activities including at Northwest Shelf Project and Pluto LNG. Some of the other key highlights of the quarter are as follows:

• Production Update: For the quarter, WPL reported total production of 22.2 MMboe, down 2% from Q2 2021, impacted by major maintenance activities.
• Increase in Average Realised Price: Average realised price for Q3FY21 increased to US$59 per barrel of oil equivalent, up ~28% from Q2FY21.
• Rise in revenue: For the quarter, the company reported total sales revenue of US$1,531 million, up 19% from Q2FY21, due to stronger average realised LNG prices.

Sales Revenue 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. Current ratio for H1FY21 stood at 2.67x, slightly up from 2.65x in H1FY20, demonstrating that the company has improved its ability to pay short-term obligations.

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

Top 10 Shareholders: The top 10 shareholders together form around 16.80% of the total shareholding, while the top four constitute the maximum holding. The Vanguard Group, Inc. and State Street Global Advisors Australia Ltd. are holding a maximum stake in the company at 5.38% and 3.01%, respectively, as also highlighted in the chart below: 

(Source: Analysis by Kalkine Group)

New CFO Appointment: On 14 December 2021, WPL announced that it has appointed Mr. Graham Tiver as Chief Financial Officer (CFO) and Executive Vice President of the company.

Key Risks:

• 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: WPL is of the view that post acquisition of BHP Petroleum International Pty Ltd, it will have the necessary balance sheet, cash flow and financial strength to fund planned developments in the near-term and invest in future energy opportunities. In Q4FY21, WPL expects to see the benefit of stronger pricing on its realised prices, reflecting the oil price lag in many of its contracts and recent increases in gas hub prices. For FY21, the company expects its total production to be in 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 six months, the stock has corrected by ~5.25% and is trading lower than the average 52-week price level band of $19.15 and $27.60. 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, peers such as like Santos Ltd (ASX: STO), Beach Energy Ltd (ASX: BPT, Cooper Energy Ltd (ASX: COE), have been considered. Considering the expected strategic and financial benefits from the proposed BHP merger, decent performance in Q3FY21, modest outlook, current trading level, and valuation, we give a “Buy” rating on the stock at the current market price of $21.54, as on 22 December 2021, 12:10 PM (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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