March quarter production for Woodside Petroleum was a little soft, as were realised LNG prices compared to the market benchmarks. WPL’s revenue numbers give no insight into the contribution from trading volumes and spot cargo sales.
At 22.3MMboe, 1Q22 production was a bit soft due to lower liquids production. This led to total production being 1% down on 4Q21 making this the 6th consecutive quarter of comparable production decline.
At a time when global oil and gas prices are heightened, WPL’s revenue is being strangely distorted by the shifts in traded LNG and the number of spot cargoes, neither of which is disclosed. This makes the headline revenue number of US$2.395 billion less meaningful than it should be.
Average realised LNG prices received were flat on 4Q21 despite the benchmarks of JCC and JKM prices being up by about 10%. JKM prices in particular have receded by about 25% in the last week creating some uncertainty, but there is risk in both directions on consensus spot LNG price forecasts.
Investment view
This penultimate production release from WPL is not irrelevant ahead of the merger with BHP Petroleum, but in the context of what is about to occur, it is just a marker along the way.
WPL’s approach to disclosure is improving under new CEO Meg O’Neill but from a low base. We hope that this can improve further as the enlarged group will be a more complex company to understand. At this point, we acknowledge WPL will be a better company postmerger beginning with gearing around 8% and enjoying a period of elevated commodity prices.
We anticipate there will be scope for some capital management activity perhaps 1-2 years away, but the proximity of some very big capex plans and uncertainty on what may be required in some of the BHP Petroleum assets requires a cautious approach for investors. Add in the likely stock overhang from BHP investors post-merger who either cannot or do not want to hold WPL shares, and we see the share price run up as a chance to switch to Santos where the opportunity for capital management and earnings growth looks decidedly superior, in our view.
We reiterate the Independent Expert’s valuation of the merged group is A$26.25-A$29.81 per share including synergies estimated at A$1.67- A$2.54 per share.
Risks to investment view
The BHP Petroleum merger presents the main risk for WPL, followed by the execution of the new major project builds. Commodity price movements could affect earnings as would movements in the USD.
Recommendation
We have retained our Hold recommendation.
