Frog in a sock

2Q23 PRODUCTION

Need To Know

• FY23 production guidance unchanged at 180-190 MMboe after soft 2Q23 outcome.
• Commodity prices easing just as Scarborough enters intensive capex phase, Trio FID taken recently and Sangomar cost increases.
• Risk and reward finely balanced, underpinning Hold recommendation

Investment Implications

There is so much going on at Woodside Energy that a soft second quarter of production is a mild distraction. The company is deep into its major expansion project spending just as commodity prices are falling and costs remain a problem.

2Q23 production was 44.5 MMboe, down -5% from 1Q23 as the Pluto turnaround temporarily reduced output. WDS has stuck with its FY23 production guidance of 180-190 MMboe which will include the ramp up of the Mad Dog Phase 2 Argos platform in the Gulf of Mexico.

Major projects. Scarborough is at 38% completion, with the NOPSEMA plans still in the ‘to do’ tray at the Commonwealth Environment office. WDS received some disappointing news on Sangomar this week with the project cost increasing to US$4.9-5.2bn (previously US$4.6bn) due to remedial work being done to the FPSO while it is still in Singapore. Sangomar is at 88% completion, but first oil production has been pushed out to mid-2024. The Trion FID in June now commits WDS to the US$7.2bn project in the GoM taking group approved project capex to over US$13bn in the last 18 months. The capex profile does peak in FY23 at US$6.0-6.5bn with free cash flow to build up over the following five years.

Commodity prices. Global concerns on economic growth have weighed on oil prices despite OPEC’s decision to tighten the spigots and lower production. The effects are visible in WDS’s achieved prices for the quarter (Figure 1) with LNG prices slipping back to US$10.90/MMbtu, down -35% on 1Q23. The benchmark JKM price halved in the same period as did the European benchmark TTF price.

WDS is still achieving double the domestic gas price on the east coast of Australia at A$12.6/GJ compared to WA at A$6.1/GJ.

Investment View

It is becoming more difficult to see how the free cash flow equation will play out for WDS. The key factors of price and production are a moving feast at the moment and the capex increase at Sangomar was a surprise element for the company. The balance sheet is still prepared for what is to come and the revised dividend policy provides some flexibility as well. The selldown at Scarborough is barely getting a mention these days so WDS seems set to carry all the risk. The investment proposition in WDS remains stable but the risks are apparent, reaffirming our Hold recommendation.

Figure 1: Average realised prices