Woodside Energy (WDS)
HOLD

Mexican shuffle

 20 Jun 2023
Sector: Energy

TRION INVESTMENT APPROVED

Need To Know

  • WDS approves US$7.2bn investment in Trion development (WDS 60% and operator), subject to JV approval (PEMEX 40%)
  • Approx. 290 MMboe 2C oil and gas resource is attractive but has execution risk
  • WDS has now approved >US$13bn net capex on major growth projects in last 18 months

The Trion development in the Gulf of Mexico has been approved by Woodside, subject to approval by its joint venture partner PEMEX, the Mexican state oil company.

Trion is a US$7.2bn project in which WDS has a 60% interest and is the operator. Its partner is the Mexican state oil company, PEMEX and WDS is carrying a US$460m interest on its behalf. WDS’s total capex is therefore US$4.8bn.

The project has a 2C resource of 479 MMboe (WDS 287 MMboe 2C) of oil and gas that will be developed using a floating production unit (FPU) capable of producing 100kbopd. This will be accompanied by a floating storage and offtake vessel (FSU) with capacity of 950kboe. The FSU will be leased and is not included in the capex total. Trion is located in Mexican waters.

The project is expected to have a relatively short payback period of less than four years as two-thirds of the resource is expected to be produced within ten years from start-up. The breakeven cost is less than US$50/bbl (US$43/bbl excluding the PEMEX carry cost).

Trion now joins WDS’s other major projects including Sangomar and Scarborough/Pluto 2. While net debt is currently very low, it will quickly reach the top end of its 10-20% gearing target by the end of FY24, in our view.

Investment View

WDS has significantly ramped up its major growth project portfolio, enhanced by the addition of the BHP Petroleum portfolio which included Trion. The associated execution risk is therefore a key factor to consider. WDS has also lowered its dividend payout policy (to >50%) to provide further capital for the growth side of the business.

WDS’s capex profile peaks in FY23 (US$6.0-6.5bn) and gradually allows free cash flow to build across the next 5 years, according to the company’s Dec22 strategy presentation.

Global oil prices are being buffeted by concerns of a lack of economic growth despite OPEC+ production cuts intended to support the price.

We see the rewards and risks in WDS as balanced and continue with our Hold recommendation.

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Stock Overview

Share Price

Company Overview

Woodside Energy is now Australia’s largest oil and gas producer after its merger with BHP Petroleum on 1 June 2021. WDS producing assets include the North West Shelf, Pluto, Wheatstone, Australian oil and Gulf of Mexico oil and gas.

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