Company Overview: Woodside Petroleum Ltd (ASX: WPL) is Australia’s leading natural gas producer, recognised for its world-class capabilities as an integrated upstream supplier of energy. The company’s existing assets include the North West Shelf Project and Pluto LNG and it also operates two floating production storage and offloading facilities, the Ngujima-Yin FPSO and the Okha FPSO. It is worth noting that the company’s North West Shelf Project has been operating for over 30 years now. The company is focused on delivering superior returns to its shareholders and its growth strategy is underpinned by its industry-leading capability and technology.  


WPL Details


 
Strong Base Business of World-Class Assets: Woodside Petroleum Ltd (ASX: WPL) is Australia’s leading LNG operator and natural gas producer with an outstanding base business of world-class assets and strong growth aspects. WPL’s existing assets include the North West Shelf Project and Pluto LNG and it also operates two floating production storage and offloading facilities, the Ngujima-Yin FPSO and the Okha FPSO. Through its efficient base business and the execution of high-quality growth opportunities, WPL seeks to deliver superior returns to its shareholders. Over the past five years, the company has witnessed significant improvement in its bottom-line. From 2015 to 2019, the company’s NPAT and EPS grew at a CAGR of 190.58% and 187.40%, respectively. 


Five Year Performance (Source: Company Reports)

In FY20, the company is continuing to progress on its near-term growth projects and international plans while managing the impacts of Covid-19. Moreover, the company’s reliable and low-cost operations continue to maximise revenue from its base business. Despite the initial shocks from Covid-19, the company’s balance sheet and cash flows have remained robust, owing to the company’s disciplined approach to cash flow and debt management. Given the current challenging scenario, the company has revised its investment expenditure guidance to US$1,700 – US$1,900 million from US$4,100 million to US$4,400 million, but it has maintained its production guidance at 97 – 103 MMboe, demonstrating the company’s resilient performance. 

FY19 Performance Highlights: During the financial year 2019 or FY19, the company earned an underlying net profit after tax (NPAT) of US$1,063 million and reported NPAT of US$343 million, reflecting the impairment of the Kitimat LNG asset. Further, the company’s operating revenue stood at US$4.87 billion in FY19 and it generated operating cashflow of US$3.3 billion, demonstrating the underlying strength of its base business. For the full year, the company paid a total dividend of 55 US cents per share (cps), representing a payout ratio of 80 percent of underlying profit.

During the year, the company worked hard to achieve alignment with its joint venture partners and to meet the expectations of regulators and the community. Further, it also laid the foundation for growth in its business while maintaining its focus as a low-cost and high-margin producer. The company achieved record LNG production rates at Pluto LNG and recorded the lowest total recordable injury rate of 0.9 per million work hours.  The company’s annual production stood at 89.6 MMboe in FY19. 


FY19 Performance Highlights (Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 14.09%. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. hold the maximum interest in the company at 3.02% and 2.95%, respectively.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
A Quick Look at Key Ratios: For FY19, the company’s gross margin stood at 44%, higher than the industry median of 40.1%. Further, the EBITDA margin stood at 71.8%, higher than the industry median of 32.4%. The company has a current ratio of 4.11x, higher than the industry median of 1.08x, demonstrating that WPL is well-equipped to pay its short-term obligations. The company’s debt to equity ratio stood at 0.41x, lower than the industry median of 0.44x.


Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Covid-19 Update: In response to Covid-19 pandemic, the company has made necessary changes to facilitate the arrangements at its facilities in order to ensure their operation is not disrupted by the spread of the virus and it has also adopted an operating model that minimises contagion risk and ensures that it can continue to provide the natural gas that is crucial to Western Australia’s energy supply and its customers globally.

Further, the company is working closely with its contractors to mitigate impacts on their businesses and till now it has received positive feedback from several contractors that this close engagement is helping them get through this difficult time. The company recently reviewed all non-committed activities supporting WPL’s growth activities and reduced its 2020 guided investment expenditure by 60%. The measures taken by WPL has placed it in a better position to weather the Covid-19 impacts than most of its competitors.

Q1FY20 Performance: In the first quarter of FY20, the company reported production of 24.2 MMboe, up 12% on pcp. During the quarter, the company successfully mitigated the impact of impacts of Tropical Cyclone Damien and was able to restore normal operations in a matter of days. 

Over the quarter, the company’s revenue was impacted by lower realised prices, decreased trading activity, the combination of oversupply and short-term demand destruction. However, the company remained focused on maintaining safe and reliable operations which have ensured gas supplies to Western Australia and its overseas customers have not been impacted.

During the quarter, the company made solid progress on its near-term growth projects, taking FID on Sangomar Field Development Phase 1 in Senegal and the North West Shelf’s Greater Western Flank Phase 3, as well as making significant execution progress on Pyxis Hub and Julimar-Brunello Phase 2. 

At the end of the March quarter, the company had over US$4 billion cash on hand, over US$7 billion of liquidity and gearing at the low end of its target range.


Production Performance (Source: Company Reports)

Change of Director’s Interest: Recently, one of the company’s Director Peter John Coleman disposed 40,000 ordinary fully paid share of the company for a consideration of $20.61 per share, via On-market trade. Mr. Coleman now directly holds 507,342 ordinary shares. He indirectly holds 73,643 ordinary shares held by Pacific Custodians Pty Ltd.

Latest Developments: The company has made good progress on the Burrup Hub and is continuing even though it has deferred target final investment decisions for Scarborough, Pluto expansion and Browse. Recently, in the month of April 2020, the company achieved an important regulatory milestone for Scarborough as the offshore regulator, NOPSEMA, accepted the Scarborough Offshore Project Proposal (OPP), following the assessment of the potential environmental impacts over the life of the project. 

The company has started the work for Sangomar Phase 1 development in Senegal and is planning to start the construction of the pipeline component of the Pluto-Karratha Gas Plant Interconnector.

What to expect: The company’s balance sheet strength and rigorous investment analysis ensure that it can preserve value for its investors through uncertain circumstances. In the financial year 2020, the company’s total expenditure, which includes investment expenditure and excludes trading, shipping and finance costs, is expected to be around US$2,400 million. The company recently reviewed all non-committed activities supporting WPL’s growth activities and reduced its 2020 guided investment expenditure by 60%. The company’s investment expenditure guidance is now expected to be between US$1,700 – US$1,900 million in FY20. Further, WPL’s production guidance is unchanged at 97 – 103 MMboe, demonstrating resilient performance from its operations.  In FY20, the company is continuing to progress on its near-term growth projects and international plans while managing the impacts of Covid-19.


Revised Investment Expenditure Guidance (Source: Company Report)    


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

 EV/EBITDA Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: As a result of the company’s disciplined approach towards cash flow and debt management, WPL has managed to retain a robust balance sheet. Over the last six months, WPL’s stock has corrected by 33.08% on ASX and is currently inclined towards its 52-week low price, offering investors a decent opportunity for accumulation. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose, we have taken peers like Oil Search Ltd (ASX: OSH), Santos Ltd (ASX: STO), and Origin Energy Ltd (ASX: ORG). Considering the company’s robust balance sheet, its decent production performance, FY20 production guidance and current trading levels, we give a “Buy” recommendation on the stock at the current market price of A$23.50, up by 2.62% on 3^rd June 2020.


WPL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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