The hubbub of the chunky interim dividend should not distract investors from the risky program ahead for Woodside. High product prices are bolstering operating cash flow but against this, the capex needed for the major projects alone is daunting.
The interim dividend comprised two parts. The first (US76cps) is the 80% payout of underlying net profit (policy) and the second (US33cps) is the 80% of net cash payment from BHP, adjusted for working capital. The Board’s 80% payout policy is inconsistent with the need for WDS to fund a very large capex program over the next few years. The main projects – Scarborough, Pluto Train 2 and Sangomar – require US$9 billion of capex between now and December 2024.
The capex landscape is more complex than it seems. WDS currently still has 100% of Scarborough to account for, and although discussions are ‘progressing’ to a sell down, there is still no news on this important point. Past experience also tells us that the costs of large offshore LNG projects usually get bigger than original budgets suggest.
The 1H22 underlying net profit of US$1,819 million was a strong result, pumped up by an average realised oil price that more than doubled over the same period last year. WDS achieved US$100 million of merger synergies and is on track to realise the US$400 million pa target by early 2024.
Investment view
WDS has barely had time to move the furniture around following the BHP Petroleum merger. The company’s capex estimate (not guidance) of US$9 billion for the big three (Scarborough, Pluto Train 2 and Sangomar) is just for the sanctioned growth within the portfolio. Trion (GoM) could need US$3-4 billion on its own before considering a range of smaller projects that cumulatively will need a further US$3-4 billion over the same 30 month time frame as the big three. To that, we can add the US$5 billion allocated to new energy and the capex picture is beginning to look more ominous than a big set at Teahupo’o (Tahiti).
The outlook becomes more perilous if global economic growth takes a tumble and drags oil prices down with it. Everyone is enjoying the very high LNG prices that are behind WDS’s bumper earnings but inserting a more conservative oil price at US$65/bbl and spot LNG at US$15/MMbtu would have WDS’s gearing quickly up above 20% by the end of FY24f.
The new lower gearing target range and the current single digit level are potentially lulling investors into a false sense of balance sheet comfort.
In our view, the market has the warm fuzzies on WDS’s production outlook and is ignoring the cold pricklies of the larger capex profile and being too optimistic on project first oil/gas.
The saving grace for WDS is the increasing amount of spot LNG sales coming through. On balance, we think a Hold recommendation can be justified.
Risks To Investment View
Commodity price movements could affect earnings as would movements in the USD. Global supply and demand of energy is volatile due to geopolitical factors which may have earnings implications for WDS, particularly as governments plan for decarbonisation. More specifically for WDS, there are portfolio risks as demonstrated by the failure to sell its Sangomar asset, and the slow progress on selling down Scarborough.
Recommendation
We have retained our Hold recommendation.
FIGURE 1: 1H22 RESULT
FIGURE 2: REVENUE BY PRODUCT
FIGURE 3: NET PROFIT FACTORS
