Woodside Petroleum is certainly not a dull company at the moment with huge projects underway and just the small matter of a merger with BHP Petroleum on the horizon.
WPL announced a much improved net profit of US$1,983 million that had many moving parts including large impairment writebacks, a big leg up from higher commodity prices and the excitement of higher trading activity in spot cargos.
An 86% rise in the volume-weighted average price to US$60/boe added just over US$3 billion in revenue in FY21. The Brent oil price was up 70% over the same time frame. WPL noted that for each US$1 movement in the Brent oil price, its 2022 net profit would change by US$18 million.
But perhaps what really grabbed some attention was the guidance for 20-25% of 2022 LNG sales to be at spot prices. WPL had greater spot exposure in Q1 and Q4 of FY21 (21 cargos compared to 2 in FY20) which helped achieve higher group revenue.
Oil prices will remain elevated in 2022 due to geopolitical tensions (Ukraine/Russia) or simply the imbalance of supply to demand.
The higher revenue and EBITDA outcomes fed into a strong free cashflow outcome of US$851 million. With the major projects of Scarborough, Pluto Train 3 and Sangomar (Senegal oil) now underway, WPL is facing a heavy capex profile for several years. FY22f capex guidance has been set at US$3.8-4.2 billion. We would remind investors to consider the tendency of big development projects to overrun budgets For example, Pluto capex was originally set at A$5-8 billion pre-FID but ended up costing around A$15 billion. There is no shortage of other examples in this space.
The free cashflow factor has another important element that was missing from the result discussion. There was no mention of potential asset sales that are on WPL’s agenda. This bares watching and carries some reasonable execution risk.
Underlying EBITDA of US$4,135 million was marginally below consensus expectations, but as is often the case with WPL, there was plenty of noise below this line that exuded a very strong net profit and hence, a final dividend that was at the upper end of the payout range.
Work on the BHP Petroleum merger is underway, but few details have been revealed so far. The post-merger gearing around 11% puts WPL in a strong position to handle its capex load but we see no wriggle room for capital management until these projects are much closer to completion. And don’t forget about the US$5 billion WPL is throwing at ‘new energy’ projects by 2030 including hydrogen and ammonia projects. The ESG factor is growing.
Target gearing is set at 15-35% and the dividend policy is still a minimum 50% of net profit with 50-80% payout.
Investment view
If WPL thought 2021 was a wild ride, 2022 beckons as an outback rodeo. The elephant in the room is the approaching merger with BHP Petroleum as the Board will need to tackle an immense amount of detail. WPL shareholders will need to be aware of the potential overhang from BHP shareholders and important details such as the management structure, portfolio structure and capital management structure will be crucial to an informed view.
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.
