One month into the newly enlarged company, Woodside Energy has benefitted from very strong commodity prices and the higher production base. WDS has a significant amount of development work on its plate and a prickly issue in the Gulf of Mexico. 2Q22 production of 33.8mboe included one month of BHPP assets. WDS adjusted its conversion factor for gas to oil equivalent units and now reports in a standard measure of mboe. CY22 production guidance is now in the range of 145-153 MMboe with LNG contributing 77-79 MMboe. WDS’s previous guidance, excluding BHPP and the conversion factor change, has been lowered to 88-94 MMboe from 92-98 MMboe.
Realised oil prices were strong, but slightly fewer spot LNG cargoes pulled the group average realised price to US$95/boe down from US$100/boe in 1Q21. With the higher production, revenue surged 44% on 1Q22 to US$3,438 million (US$5.8 billion in 1H22). WDS is guiding CY22 capex to US$4.3-4.8 billion. The major projects of Sangomar (approximately 25% of total capex) and Scarborough and Pluto Train 2 (~45%) dominate the expenditure. WDS is expecting to spend approximately US$400-500 million on exploration in CY22. The company has now terminated its sale process for Sangomar (in Senegal) and simply noted the sell-down process at Scarborough is progressing.
The Gulf of Mexico assets are falling short on production and reserves. When the Independent Expert Report was released, we were sceptical of the approach and values presented by the IER in the GoM. In the short term, delays at Mad Dog 2 (up to 5 MMboe) and a poor outcome at Atlantis of just 5.6 MMBoe in the half year has left the full year production expectations for the GoM well short of what the IER anticipated. We note that Atlantis 1P reserves are just 43% of 2P reserves compared to around 70% for the other GoM assets. The combined Mad Dog, Shenzi and Atlantis assets produced about 11.7 MMboe in 1H22 (by combining the BHP and WDS releases) but the IER anticipates CY22 production of 37 MMboe. This is leaving much work to do in the second half of this year for that to be achieved.
Investment view
The sheer size and scope of the new WDS has the market very enthusiastic and mostly with good reason. As a top 10 global independent producer with a geopolitically favourable mix of assets, a decent chunk of LNG production selling into spot markets at high prices, and with some substantial new projects underway, there is much to admire. The windfall of cashflow will at least be partially consumed by the new projects, but shareholders could be salivating at the prospect of seeing some of that cashflow too. Our sense of caution stems from the concerns over the GoM assets.
Our caution also resides in a potential underestimation of the capex load. WDS has a great balance sheet and oodles of free cash flow under the current zesty commodity prices, but the share price is arguably baking these conditions into perpetuity.
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: WDS QUARTERLY PRODUCTION
FIGURE 2: WDS AVERAGE REALISED PRICES
