Company Overview: Woodside Petroleum Ltd (ASX: WPL) is Australia’s leading LNG operator and natural gas producer, recognised for its world-class capabilities as an integrated upstream supplier of energy. Since 1989, the company has delivered more than 5000 LNG cargoes to its international customers. The company’s existing assets include the Woodside-operated Pluto LNG and North West Shelf (NWS) Project. The company also has participating interest in Wheatstone and equity interests in Canada (Kitimat LNG) and Timor-Leste/Australia (Sunrise). WPL also operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO.

WPL Ratios

Track Record of Generating Significant Cashflows: Woodside Petroleum Ltd (ASX: WPL) is an Australian oil and gas company focused on providing sustainable energy solutions to shareholders, communities, government, and other stakeholders. As on 9 December 2020, the company’s market capitalisation stood at ~AUD22.23 billion. WPL enjoys a base business with low-cost and strong margins, providing resilient cash flows. The company is focused on delivering superior shareholders returns through its efficient base business and the execution of high-quality growth opportunities. From 2015 to 2019, the company’s operating cash flows grew at a CAGR of 7.50%.

Cashflow and Profitability Trend (Source: Company Reports)

With decent year-to-date production in FY20, the company seems well-placed to meet its FY20 production guidance of 99 to 101 million barrels of oil equivalent. Looking ahead, the company is focused on preparing financially for the upcoming targeted investment decisions in Scarborough and Pluto Train 2. The company intends to reduce its equity position in Pluto Train 2 to around 50% before FID, and for Sangomar to around 40-50%. Moreover, with decent liquidity position, the company seems well placed to undertake value-accretive inorganic opportunities and other investment decisions next year.

H1FY20 Results Highlights: During H1FY20, the company reported record first-half production of 50.1 MMboe and achieved an underlying profit of US$303 million, despite dynamic market conditions. For the period, the company reported total operating revenue of US$1,907 million and net loss of US$4,067 million. During H1FY20, the company achieved 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. The company ended the period 1HFY20 with liquidity of US$7,552 million.

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 12.69%. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. hold maximum interest in the company at 2.95% and 2.75%, 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 by the end of H1FY20.

Key Metrics (Source: Company Reports)

September 2020 Quarter Highlights: For the September 2020 quarter, the company reported production of 25.3 MMboe, taking the total year-to-date production to 75.4 MMboe, representing a growth of 18% as compared to the first three quarters of 2019. During the quarter, the company reported operating performance from its LNG facilities and completed the planned maintenance at Karratha Gas Plant’s LNG Train 3. The company delivered sales volume of 26.7 MMboe in Q3FY20, up 10% from Q3 2019. Further, the company reported total sales revenue of $699 million, down by 9% on the previous quarter, impacted by lower realised LNG prices, reflecting the oil price lag in many of the company’s contracts. 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.

Q3FY20 Results (Source: Company Reports)

Sangomar Transaction Update: To increase its interest in the Sangomar Field Development offshore Senegal, the company has executed a sale and purchase agreement with Capricorn Senegal Limited for its entire participating interest. 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.  On September 4, 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. Recently on 3^rd December 2020, the company is exercising its right to pre-empt the sale by FAR Senegal RSSD SA (FAR) to ONGC Videsh Vankorneft Pte Ltd (ONGC) of FAR’s entire participating interest in the RSSD joint venture. The company intends to fund this acquisition from its current cash reserves. Following the completion of this acquisition and the Cairn acquisition, WPL participating interest in the RSSD joint venture will increase to 82% for the Sangomar exploitation area and 90% for the remaining RSSD evaluation area.

CEO Succession: The company recently announced that its CEO, Peter Coleman, is going to retire in the second half of 2021. Mr. Peter’s decision to retire in 2021 ensures continuity to support the Scarborough investment decision, which will transform WPL. WPL has started an internal and external search for the company’s next CEO, who will be taking the required ownership of the company’s significant growth projects.

Outlook: On the back of improving oil prices in recent months and strengthening Asian LNG spot price, the company expects the pricing in the fourth quarter and in Q1 2021 to be stronger. For the full year 2020, the company expects its total production to be in the range of 99-101 MMboe. The total investment expenditure for FY20 is expected to be in between US$2,100 million – US$2,300 million.

Looking ahead into 2021, the company is focused on preparing for the targeted investment decisions in Scarborough and Pluto Train 2. With regards to its Scarborough project, the company expects the project to deliver net cash flow of approximately US$35 billion over the life of the field, based on the company’s current participating interest. Further, the company is aiming to reduce its interest from the current 100% to a target of around 50% prior to FID, which would significantly reduce its capital spending by about US$3 billion.

Lately, the company has made significant progress at Sangomar Field Development Phase 1 offshore Senegal and expect to complete its acquisition of Cairn’s interest in the joint venture before year-end. With resilient hydrocarbon business, existing capabilities in LNG, investments in technology, the company seems well placed to provide value through the energy transition.

FY20 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: (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 three months, the stock of WPL has provided a return of 24.23% and is currently trading lower than the average 52-weeks price level band, offering a decent opportunity for accumulation.  On the technical analysis front, the stock has a support level of ~A$21.81 and a resistance level of ~A$23.64.  We have valued the stock using 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, FY20 guidance, current trading levels, and valuation, we give a “Buy” recommendation for the stock at the current market price of A$22.81, down by 1.299% on 9 December 2020.

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

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