Company Overview: 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. 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. WPL also operates two floating production storage and offloading (FPSO) facilities, the Okha FPSO and Ngujima-Yin FPSO.

WPL Details

Developing Two Energy Projects to Improve Future Growth: Woodside Petroleum Ltd (ASX: WPL) is an integrated upstream supplier of energy with world-class capabilities. Over the past decade, the company has expanded its portfolio from one major asset to three, with the startup of Pluto LNG and of Wheatstone building on the success of the Northwest Shelf Project. It is currently focused on the development of two more projects in Senegal and Scarborough. The company follows a disciplined and prudent approach to capital management, which allows it to maintain a resilient financial position and maximises the value from its portfolio of opportunities. Despite facing challenging operating conditions caused by the COVID-19 pandemic, WPL delivered on its commitment to reach 100 MMboe of production in 2020, demonstrating the operational strength of its business. Due to COVID-19 pandemic and dramatic decline in oil price, the company’s financial performance in FY20 was severely impacted. With the recovery of economies all around the globe and roll-out of vaccines, the company is witnessing strong oil demand recovery in 2021. In the years ahead, WPL expects to see strong demand for LNG, particularly from countries in the Asia-Pacific region.

Production Trend (Source: Analysis by Kalkine Group)

Looking ahead, the company is focused on transforming its operations to maintain low costs. In terms of creating value, the company is focused on achieving targeted Scarborough FID in H2FY21 and delivering Sangomar Phase 1. The company has obtained key regulatory approvals for the development and commercial arrangements of Scarborough. Further, it is witnessing strong interest in Scarborough from customers and has already contracted half of its expected equity offtake gas. WPL is also progressing the Sangomar Field Development Phase 1, which is targeted to commence in mid-2021.

Decent Rise in Q1FY21 Sales Revenue: For Q1FY21, WPL reported sales revenue of US$1,121 million, up 4% on Q1FY20 and up 22% on Q4FY20, driven by higher realised prices for all products. The total production for the quarter stood at 23.7 MMboe, down by 2% on Q1FY20, impacted by cyclone season. Sales volume for Q1FY21 stood at 25.7 MMboe, up 8% from Q1 2020. Over the quarter, the company made substantial progress on the Sangomar Field Development Phase 1. During the quarter, WPL signed a memorandum of understanding with the Government of Tasmania for the proposed H2TAS renewable hydrogen project.

Sales Revenue Trend (Source: Analysis by Kalkine Group)

FY20 Result Highlights: During FY20, WPL reported annual production of 100.3 million barrels of oil equivalent in FY20, up 12% on FY19. Further, the company achieved a record annual sales volume of 106.8 million barrels of oil equivalent in FY20, up 10% on the previous year. For FY20, the company reported a net loss of US$4,028 million, impacted by the plunge in the oil price and major write-downs of its assets announced in July 2020. During the year, the company generated an operating cash flow of US$1.8 billion, and finished the year with decent liquidity of US$6.7 billion. For the full year, the company paid a total dividend of US 38 cps.

Key Metrics: In the second half of FY20, the company reported gross margin of 28.2%, up from 7.2% in H1FY20. EBITDA margin in H2FY20 stood at 45.2%, up from 37.6% in H1FY20. For H2FY20, the company reported current ratio of 2.03x, higher than the industry median of 1.15x. Debt to equity ratio for H2FY20 stood at 0.62x.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 14.01% 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 5.89% and 2.95%, respectively, as also highlighted in the chart below:       

Source: Analysis by Kalkine Group

Announced Divestment of Kitimat LNG: On 18 May 2021, the company announced that it is divesting 50% non-operated participating interest in the proposed Kitimat LNG (KLNG) development. It is expected that this divestment will allow the company to focus on the successful delivery of higher value opportunities in Australia and Senegal. The costs associated with the decision is expected to have an impact of around US$40 million – 60 million on FY21 NPAT.

Key Appointments and Board Changes: WPL recently announced the resignation of Peter Coleman as CEO of the company. Ms. Meg O’Neill, WPL’s Executive Vice President of Development and Marketing, was appointed the CEO of the company. On 2^nd June 2021, WPL announced the appointment of Mr Ben Wyatt as a non-executive director of the company.

Signed SPA with RWE for LNG Supply: In February 2021, WPL’s subsidiary, Woodside Energy Trading Singapore Pte Ltd entered into a sale and purchase agreement (SPA) with RWE Supply & Trading GmbH (RWE) for the supply of LNG from WPL’s global portfolio. Under the agreement, Woodside Energy Trading Singapore Pte Ltd will supply 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 and uncertainties of COVID-19 pandemic, which could impact the demand and price of oil and gas in the market. Further, the pandemic could create logistics and supply chain issues, which could affect the cost of doing business. The company is also exposed to the risks related to fluctuations in the foreign currency exchange rates.

Outlook:  At the recently held Credit Suisse Energy Conference, WPL confirmed that it is witnessing strong oil demand recovery in 2021. WPL has commenced Operations Transformation program, which is aiming to improve cost efficiency by 30% over the next three years. Further, the company is focused on the development of its projects in Senegal and Scarborough. For FY21, the company expects its total production to be in the range of 90 – 95 MMboe. The company’s investment expenditure guidance for FY21 is expected to be in the range of US$2.9 billion to US$3.2 billion.

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 three months, the stock has corrected by 7.166% and is trading slightly above its average 52-week price level range of $16.8 and $27.6. 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 some discount to its peers, considering weaker financial performance in FY20, impact of COVID-19 pandemic, and also taking into consideration that the company has been trading at a discount in the past 3-years over its peer average. We have taken peers like Cooper Energy Ltd (ASX: COE), Oil Search Ltd (ASX: OSH), Senex Energy Ltd (ASX: SXY). Considering the company’s decent performance in Q1FY21, continued focus on cost optimisation, decent long-term outlook, recent recovery in oil demand, and valuation, we give a “Buy” rating on the stock at the market price of $22.16 (as on Jun 30, 2021), 11.45 AM (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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