Company Overview: Woodside Petroleum Ltd (ASX: WPL) is leading energy in Australia, primarily involved in the development and exploration of gas, oil and condensate reserves. The company’s operating assets have a strong track record in project development. 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. The company’s growth strategy is underpinned by industry-leading capability, technology and focus on sustainable energy solutions.

WPL Details

Decent Base Business Fundamentals: 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 is focused on delivering superior returns to its shareholders by utilising its operational, development and drilling capabilities, and by deepening relationships in LNG markets with strong demand growth. Over the recent years, the company has expanded its base business, which is visible with the facts of completing Greater Enfield Project, the start-up of Wheatstone and delivery of subsea tie-backs extending the field life of WPL’s assets. Over the last five years, the company has maintained decent annual production and has delivered significant cash flows. Further, the company has also witnessed significant improvement in its bottom-line with NPAT growing at a CAGR of 190.5% from 2015 to 2019.

Five-Year Performance (Source: Company Reports)

Over the last few months, the markets all around the world have been witnessing unprecedented disruptions to operations due to the impacts of COVID-19 pandemic. During this period, the company tackled price volatility and other risks by managing its existing long-term sales contracts and proactively optimising its LNG portfolio. In order to deal with future uncertainties, the company reduced its investment in exploration and operating expenditure and deferred final investment decisions on its major growth projects. Looking ahead, the company is focused on developing the Scarborough and Browse gas resources through its proposed Burrup Hub. 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. Despite the difficult external conditions, the company continues to maintain a robust balance sheet with high liquidity and decent cash flow. Due to this, the company seems well placed to progress its existing strategic growth plans, and pursue the right external opportunities, if they arise.

FY19 Results Highlights: For the year ended 31 December 2019 or FY19, the company reported total production of 89.6 MMboe and operating revenue of US$4.87 billion. The company NPAT for FY19 stood at US$343 million, compared to the NPAT of US$1,364 million in FY19. The decrease in NPAT was mainly due to the $720 million impairment cost related to Kitimat LNG asset. Further, the company’s generated operating cashflow of US$3.3 billion and free cashflow of $2.1 billion, demonstrating the underlying strength of its base business. 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. 

One of the important highlights of FY19 was the completion of the Greater Enfield Project, on schedule and budget. The company also completed major turnarounds at Pluto LNG and NWS Project. 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. 

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.

FY19 Results (Source: Company Reports)

H1FY20 Results Highlights: During the first- half of FY20, the company was able to deliver record production of 50.1 MMboe and underlying net profit after tax of US$303 million, despite the dynamic market conditions and the global impacts of the COVID-19 pandemic. The company achieved a low unit production cost of $4.5/boe across its portfolio. For H1FY20, the company reported operating revenue of US$1,907 million and an EBITDA loss of US$4,295 million. Further, the company reported a net loss after tax of US$4,067 million in H1FY20, mainly due to the impairment losses and onerous contract provision.

During the half-year, the company generated US$1,107 million of cash flow from operating activities and ended the period with a liquidity of US$7,552 million. The company’s gearing ratio stood at 19.4% in H1FY20. Over the period, the company strategically managed its debt portfolio by minimising near-term maturities and maintaining a low cost of debt. WPL completed a $600 million syndicated facility with a term of seven years.

For H1FY20, the company has declared an interim dividend of US 26 cents, representing around 80% payout ratio of underlying net profit after tax. The dividend has an ex-date of 24 August 2020 and payment date of 18 September 2020.

H1FY20 Results Snapshot (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 14.03%. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. hold the maximum interest in the company at 2.98% and 2.92%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s gross margin and EBITDA margin stood at 7.2% and 37.6%. Further, the company’s current ratio stood at 2.65x, higher than the industry median of 1.09x, 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: Company Reports)

Acquiring RSSD Joint Venture: On 4 September 2020, the company announced that it has signed a binding sale and purchase agreement to acquire Capricorn Senegal Limited’s entire participating interest in the RSSD joint venture. In order to complete this acquisition, the company requires approval from Government of Senegal and from the shareholders of Cairn Energy PLC. It is expected that the acquisition will be completed by Q4 2020. This acquisition will allow WPL to increase its stake in the well understood, world-class asset with near-term production.

Managing COVID-19 Impacts: The company entered COVID-19 pandemic with a decent balance sheet, characterised by low gearing, high liquidity and an operating model with the low unit operating costs. In order to deal with the impacts of the pandemic and lower oil and gas prices, the company has cut planned total expenditure in 2020 by 50% and has delayed final investment decisions (FIDs) on its Scarborough, Pluto Train 2 and Browse developments.

Key Risks: The company is exposed to the risks and uncertainties related to the impacts of COVID-19 pandemic as it could impact the company’s supply chain and project schedules. The company is exposed to the risks related to the fluctuations in the price of oil and gas. In addition, 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: For FY20, the company expects its total production to be between 97mmboe – 103mmboe. The company expects its investment expenditure in FY20 to be in the range of US$1,500 million- US$1,700 million. WPL’s total expenditure in FY20 is expected to be around US$2400 million.

Expenditure Guidance (Source: Company Reports)

Looking ahead, the company is focused on developing the Scarborough and Browse gas resources through its proposed Burrup Hub. 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 intends to continue to actively manage its debt portfolio throughout the remainder of 2020. Despite the difficult external conditions, the company continues to maintain a robust balance sheet with high liquidity and decent cash flow. Due to this, the company seems well placed to progress its existing strategic growth plans, and pursue the right external opportunities, if they arise.

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: The stock of WPL has corrected by 18.13% in the last three months and it is inclined towards its 52-weeks low price, offering a decent opportunity for accumulation. On the technical analysis front, the stock has an immediate support level of ~A$18.26 and a resistance level of ~A$22.2.  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), AGL Energy Ltd (ASX: AGL), Ampol Ltd (ASX: ALD). Considering the company’s recently signed sale and purchase agreement to acquire RSSD joint venture, its decent production performance in H1 FY20, decent FY20 guidance, robust balance sheet, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $18.36, down by 4.375% on 9 September 2020.

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

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