High stakes

RESULTS ANALYSIS

Need To Know

• Major projects edging forward but risks remain elevated.
• Gearing at low end of target range.
•  WDS fully valued given the risk profile, in our view.

Investment Implications

Result overview:

EBITDA US$4,888m, consensus US$5,100m

Net profit US$1,896m, consensus US$1,769m

Interim dividend US80cps, 80% payout, consensus US82cps

Investing cash flow US$2,631m, Free cash flow US$294m

Net debt US$3,220m, gearing 8.2% (target 10-20% through cycle)

1H23 result. 1H23 net profit of US$1,896m included a negative US$898m impact from lower commodity prices but benefited from the higher volumes from the BHP Petroleum assets and the Pluto-KGP Interconnector. The planned turnaround activity added US90c to production costs which were reported as US$8.80/boe. Including the US80cps interim dividend, gearing would be 12.1%, at the lower end of the 10-20% target range which CFO Graham Tiver described as ‘prudent’.

Operating cash flow of US$2.9bn was mostly consumed by US$2.6bn of investing cash flow leaving free cash flow just in positive territory at US$294m for the period. Net debt stands at US$3.2bn.

The possibility of industrial action at the NWS platforms would impact the feedstock to the LNG plants, but CEO Meg O’Neill described the negotiations as ‘constructive’. The LNG plants have no flexibility if the feedstock is severely disrupted (Pluto gas contains too much nitrogen) so not only would international LNG supply be affected but domestic gas supply in WA also.

Environmental Permits for Scarborough are making progress with the seismic approvals done. The secondary approvals for drilling, trunkline and other aspects are on-going. Ms O’Neill said there is now “clarity in the marketplace” on what NOPSEMA needs following plenty of discussion after the Barossa project (owned by Santos) was halted.

The delay to the Sangomar project was due to the poor quality of materials used on the Chinese built FPSO, discovered when the ship arrived in Singapore. WDS has completed the remedial work but is now acutely aware of ensuring the same issues do not impact the Scarborough FPSO also being built in China.

Ms O’Neill said the Scarborough selldown was “nice to do, not a must-do” with regard to LNG Japan’s 10% stake. She added: she was “comfortable with 90%” of Scarborough given Pluto had been completed on the same exposure. WDS is in on-going discussions with other counterparties for LNG offtake agreements suggesting further project de-risking is likely.

With an indirect reference to government tinkering with PRRT taxes, WDS noted it has paid over US$1bn in PRRT in the last 12 months and paid US$3.7bn in total taxes and excise in 1H23. The company’s all-in effective tax rate sits at 42%.

Outlook. Capex guidance for FY23 is US$6.0-6.5bn. Production guidance is unchanged at 180-190mmboe (1H23 91.3mmboe). WDS increased its guidance for exposure to Gas Hub sales of LNG to 27-33% for FY23. Gaining spot exposure could add some spice to LNG revenue is prices recover.

Investment View

WDS’s balance sheet is solid, but with gearing rising as the major projects enter the heavy capex phase. Scarborough remains the key risk exposure at 90% even though the company speaks to on-going discussions for further selldown possibilities. The environmental planning permissions remain outstanding. Now with Sangomar and Trion added to the list, WDS has multiple big expansion projects underway and others on the horizon. The second key risk is what happens to commodity prices – LNG obviously, but also the oil price.

Between Scarborough, Sangomar and the Gulf of Mexico developments, WDS has a huge amount of capex and execution underway. The broader pipeline has CCS projects, other oil and gas options plus the US$5bn commitment to new energy projects. Discipline on its balance sheet deployment will be crucial. The more conservative target gearing range provides some comfort, but shareholders should be aware that the dividend could likewise be reigned in if things get tight. The dividend yield is attractive for now but may not stay that way.

The share price is near fully priced given the risk profile, in our view. We retain our Hold recommendation.