Company Overview: Woodside Petroleum Ltd (ASX: WPL) is an Australian oil and gas company mainly involved in delivering sustainable energy solutions. The company runs a robust hydrocarbon business with a focus on LNG. WPL has a focused portfolio and is known for its world-class capabilities as an integrated upstream supplier of energy. It also operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO. The company’s operations are characterised by strong LNG reliability, cost discipline and strong safety and environmental performance. 

WPL Details

Long-term Outlook Supported by the Development of Energy Projects: Woodside Petroleum Ltd (ASX: WPL) is a leading Australian natural gas producer focused on providing affordable energy solutions that deliver enduring value to shareholders, communities, governments and other stakeholders. As of 28 April 2021, WPL’s market capitalisation stood at ~A$22.01 billion. Despite the challenging operating conditions caused by the COVID-19 pandemic, WPL reported annual production of 100.3 million barrels of oil equivalent in FY20, setting a new record for WPL. The company achieved another record for its annual sales volume which grew by 10% YoY to 106.8 million barrels in FY20. WPL also achieved a low unit production cost of US$4.8 per barrel of oil equivalent and a strong cash margin of 78%. From 2016 to 2020, the company has maintained decent production levels as demonstrated in the below figure.

Production Trend (Source: Company Reports)

Looking ahead, WPL is focused on the development of its projects in Senegal and Scarborough. The company has an acute cost focus across all areas of the business, and it has already commenced Operations Transformation Program, which is aiming to improve cost efficiency by 30% over the next three years. In the years ahead, WPL expects to see strong demand for LNG, particularly from countries in the Asia-Pacific region. With strong foundations for new energy business, and long-standing customer relationships, WPL seems well placed to cater to the growing demand for carbon-neutral energy.

FY20 Results Highlights: Despite the operational challenges posed by the COVID-19 pandemic, WPL delivered a record full-year production of 100.3 million barrels of oil equivalent in FY20, up 12% on FY19. The company reported record annual sales volume 106.8 MMboe and reported operating revenue of US$3,600 million in FY20. During the year, WPL executed fully-termed gas processing agreements for processing third-party gas through the North West Shelf Project facilities. Further, the company also executed drilling campaigns for Pyxis Hub and Julimar-Brunello Phase 2. At Scarborough, the company increased offshore design capacity by approximately 20% to 8.0 Mtpa of LNG. At Sangomar, the company continued its project execution activities during the year and achieved FID for Sangomar Field Development Phase 1. Net loss after tax for FY20 stood at US$4,028 million, impacted by the decline in sales revenue, pre-tax impairment losses of US$5,269 million, and an onerous contract provision of US$447 million. For the full year, the company paid a total dividend of US 38 cps. As at 31 December 2020, the company had cash on hand of US$3,604 million and liquidity of US$6.7 billion.

FY20 Performance Summary (Source: Company Reports)

Decent rise in Q1FY21 Sales Revenue: For Q1FY21, the company reported sales revenue of US$1,121 million, up 4% on the previous corresponding period (pcp) and up 22% on Q4FY20, driven by the higher realised prices for all products. During the quarter, the company achieved record spot LNG prices and its highest price premium for an oil cargo. WPL delivered production of 23.7 MMboe in Q1FY21, down by 2% on pcp. Moreover, the company delivered sales volume of 25.7 MMboe in Q1FY21, up 8% on pcp. During the quarter, WPL ramped up engineering and procurement activities for Scarborough.

Q1FY21 Sales Volume and Sales Revenue (Source: Company Reports)

Key Metrics: Due to the impacts of the COVID-19 pandemic, weakened global demand, and reduction in prices, the company’s profitably margins were impacted in FY20. Gross margin for FY20 stood at 17.1% in FY20, down from 44% in FY19. EBITDA margin for FY20 stood at 41.2%, down from 71.8% in FY19. Current ratio for FY20 stood at 2.03x, higher than the industry median of 1.09x.

Profitability Metrics and Liquidity Profile (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 13.79% of the total shareholding while the top four constitutes the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.90% and 2.95%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Update on Scarborough Gas Resource: WPL is currently progressing the development of the Scarborough gas resource through the world-class Pluto LNG facility. Scarborough is a globally competitive project that is expected to make a significant contribution to the company’s future and to the Australian economy. So far, the company has received key regulatory approvals to process Scarborough gas through a second LNG Train at Pluto. WPL continues to witness strong interest in Scarborough from its customers and has already contracted half of its expected equity offtake gas. The final investment decision for Scarborough is expected in H2FY21.

Signed SPA with RWE for LNG Supply: In February 2021, Woodside Energy Trading Singapore Pte Ltd entered into a sale and purchase agreement (SPA) with RWE Supply & Trading GmbH (RWE) for the supply of approximately 0.8 Mtpa of LNG from WPL’s global portfolio for a term of seven years commencing in 2025. This SPA will allow WPL and RWE to explore the potential for carbon-neutral LNG production and trading.

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.

Outlook:  WPL has made progress on the future of the North West Shelf Project, as it transitions the Karratha Gas Plant into a third-party tolling facility, executing agreements for Pluto and Waitsia gas. The Karratha Gas Plant is expected to deliver value and provide opportunities to unlock value from other resources in the future. Further, the company is actively working with customers across its LNG, liquids and domestic gas businesses on potential opportunities for carbon management in the marketing of its products.

The company intends to reduce its interest in Sangomar to a target of around 40% to 50%. It also plans to reduce its interest in Pluto Train 2 to around 50%. In 2021, the company is targeting full-year production of 90 million to 95 million barrels of oil equivalent. The company’s investment expenditure guidance for 2021 is expected to be in the range of US$2.9 billion to US$3.2 billion. The company will continue to review the payout ratios to ensure that it is delivering value to shareholders, consistent with prudent capital management and its funding requirements in coming years.

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

Data Source: Refinitiv, Thomson Reuters, 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.

** 1 USD = ~1.29 AUD

Stock Recommendation: Over the last three months, the stock has corrected by 9.42%. The stock has a 52-week low and high of $16.8 and $27.6, respectively. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer median EV/EBITDA (NTM trading multiple), considering decent performance in Q1FY21, receival of key approvals for Scarborough, and improved realised prices. We have taken peers like Oil Search Ltd (ASX: OSH), Senex Energy Ltd (ASX: SXY), Santos Ltd (ASX: STO), etc. Considering the company’s improved results in Q1FY21, progress in the development of Scarborough project, ongoing focus on cost reduction, modest long-term outlook and valuation, we give a “Buy” recommendation on the stock at the current market price of $23.11, up by 1.137% as on 28 April 2021.

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

Note: 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.

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