Company Overview: Woodside Petroleum Ltd (ASX: WPL) is an Australian oil and gas company, focused on providing sustainable energy solutions to shareholders, communities, governments and other stakeholders. The company is known for its world-class capabilities as an integrated upstream supplier of energy. In Western Australia, the company is creating an integrated LNG production hub on the Burrup Peninsula which will extend the life of the world-class North West Shelf and Pluto LNG facilities. The company also operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO.

WPL Details

Improving Bottom-line: Woodside Petroleum Ltd (ASX: WPL) is Australia’s leading LNG operator and natural gas producer. The company has a global portfolio and is recognised for its world-class capabilities as an integrated upstream supplier of energy. As of 28 October 2020, the market capitalisation of the company stood at ~$17.32 billion with an annual dividend yield of 6.63%. The company is focused on delivering superior shareholders returns through its efficient base business and the execution of high-quality growth opportunities. Over the last five years, the company has delivered significant cash flows and has witnessed substantial 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.

Cashflow and Profitability Trend (Source: Company Reports)

FY19 Result Highlights: For the year ended 31 December 2019, the company reported total production of 89.6mmboe and underlying net profit after tax (NPAT) of US$1,063 million. During the year, the company generated operating cashflow of US$3.3 billion, indicating the underlying strength of its base business. During the year, the company secured agreement on the tolling price to bring Scarborough gas through the Pluto facility and reached a final investment decision on the pipeline component of its Pluto-Karratha Gas Plant Interconnector. For the full year, the company paid a total dividend of 91 US cents per share, representing a payout ratio of 80%.

FY20 Results Highlights (Source: Company Reports)

H1FY20 Performance Highlights: During H1FY20, the company reported the highest ever first-half production of 50.1 MMboe, despite the challenges caused by the COVID-19 pandemic. In H1FY20, the company achieved a low unit production cost of US$4.5/boe across its portfolio and reported a positive free cash flow of US$264 million. Over the half-year, the oil and gas prices were negatively impacted, mainly due to geopolitical dynamics, global economic uncertainty and energy demand destruction caused by the COVID-19 pandemic. In response to the COVID-19 pandemic, the company reduced its total expenditure in 2020 by 50% and delayed final investment decisions (FIDs) on its Scarborough, Pluto Train 2 and Browse developments. Due to non-cash impairment losses and onerous contract provision announced in July 2020, WPL incurred a net loss after tax of US$4,067 million in H1FY20. For H1FY20, WPL has declared an interim dividend of 26 US cents per share (cps), representing an approximately 80% payout ratio of underlying net profit after tax which stood at US$303 million. At the end of H1FY20, the company had total liquidity of US$7,552 million, up 43% from H1 2019.

H1FY20 Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 12.66%. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. hold the maximum interest in the company at 2.95% and 2.82%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s EBITDA margin stood at 37.6%, higher than the industry median of 36.5%. Further, the company’s current ratio stood at 2.65x, higher than the industry median of 1.08x, demonstrating that the company is well equipped to pay its short-term obligations. The company’s debt to equity multiple stood at 0.61x in H1FY20.

Key Metrics (Source: Refinitiv, Thomson Reuters)

September 2020 Quarter Highlights: For the quarter ending 30^th September 2020, the company reported production of 25.3 MMboe, taking the total year-to-date production to 75.4 MMboe, up 18% compared with the first three quarters of 2019. The company’s sales volume for Q3 FY20 stood at 26.7 MMboe, up 10% on pcp. During the quarter, the company delivered sales revenue of US$699 million, down 9% from Q2 2020, reflecting the oil price lag in many of the company’s contracts. Over the quarter, the company completed the planned maintenance at Karratha Gas Plant’s LNG Train 3 with appropriate COVID-19 management. The company also conducted an organisational review of its future workforce requirements, resulting in an approximately 8% reduction in the size of its direct employee workforce.

Sangomar Transaction Update: On 17 August 2020, the company announced that it is exercising its right to pre-empt the sale by Capricorn Senegal Limited (Cairn) to LUKOIL Upstream Senegal BV (Lukoil) of Cairn’s entire participating interest in the RSSD joint venture. Later on 4 September 2020, Woodside Energy (Senegal) B.V entered into a binding sale and purchase agreement to acquire Cairn’s entire participating interest in the RSSD Joint venture. It is expected that the acquisition will be completed by Q4 2020, subject to Government of Senegal approval, Cairn Energy PLC shareholder approval and fulfilment of other customary conditions. Following this transaction, WPL’s interest in the Sangomar exploitation area will increase to approximately 68.33%.

Key Risks: WPL is exposed to the risks related to the fluctuations in the prices of oil and gas. Further, the company is also exposed to the risks related to the impacts of COVID-19 pandemic.  WPL’s financial strength and performance may be impacted by numerous factors like disruption in market dynamics and the ability to maintain a competitive advantage.

What to Expect: With decent year-to-date production in FY20 amid COVID-19, WPL is currently on track to achieve its FY20 production guidance of 97 – 103mmboe.  The company continues to implement appropriate responses to the combined impact of COVID-19 and lower commodity prices. Further, the company is continuing the work on commercial agreements and regulatory approvals to make sure that it is ready to take FIDs when investment conditions improve. The company expects its investment expenditure in FY20 to be between US$1,500 million – US$1,700 million. WPL continues to operate with a robust balance sheet, characterised by low gearing, high liquidity and an operating model with a low unit operating costs. Due to the improvement in oil prices over recent months, the company expects the pricing to be stronger in Q4 FY20 and Q1 FY21.

FY20 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last six months, the stock of WPL has corrected by 15.61% and is currently inclined towards its 52-weeks low price of A$14.930. On the technical analysis front, the stock has a support level of ~A$16.85 and a resistance level of ~A$23.59.  We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as Oil Search Ltd (ASX: OSH), Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY), etc. Considering the company’s decent production performance, robust balance sheet, disciplined approach to capital management, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of A$17.72, down by 1.556% on 28 October 2020.

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

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