Company Reports

No-moat Woodside's shares are down 24% from September 2023 highs and, at about AUD 29, are materially undervalued, in 5-star territory. We think the share price is at odds with solid progress being made on growth projects.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

No-moat Woodside reported stronger-than-expected underlying 2023 net profit after tax, down 37% to USD 3.3 billion (AUD 2.63 per share) against our USD 3.0 billion (AUD 2.33 per share) expectations. Lower-than-anticipated depreciation largely accounts for the profit beat, and we see no long-term implication for our unchanged AUD 45 fair value estimate. The weaker 2023 result reflects a 26% decline in average pricing to USD 66.60 per barrel of oil equivalent, easily offsetting a 19% increase in production to a record 187 million barrels of oil equivalent.

Over two months since first confirming merger discussions were underway, Woodside and Santos are walking away with no agreement. The no-moat Australian oil and gas producers have provided little color, save for Woodside reiterating it only pursues transactions when value-accretive for shareholders. Excellent news.

Our AUD 45 fair value estimate for no-moat Woodside stands. The global top 10 independent hydrocarbon producer reported steady fourth-quarter 2023 production of 48 million barrels of oil equivalent, or mmboe, and a higher average price, up 7% to USD 64 per boe. Both were broadly as we expected, and our respective fiscal 2023 EPS and DPS estimates of AUD 2.33 and AUD 1.93 are little changed. The dividend equates to a healthy 6.2% full franked yield at the current share price.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

Woodside and Santos have confirmed that they are in early-stage discussions on a potential merger. We think a merger overall has considerable merit. However, no further details are provided by the no-moat businesses and there is no certainty a deal will proceed. A merger would be unlikely to change our view on the moat rating.

Our AUD 45 fair value estimate for no-moat Woodside stands. The global top 10 independent hydrocarbon producers reported lower-than-expected third-quarter production and price achievement though we read no long-term implication from the fact. Rather we are heartened by reported progress on development projects.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this company's intrinsic value.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this firm's intrinsic value.

The failure of the OPEC coalition to reach agreement on production cuts on March 6 has sent oil prices into a tailspin, with Brent crude dropping into the low USD 30s in early trading before landing in the mid USD 30s. That's the biggest single-day loss in almost 20 years, essentially wiping out all gains since the 2016 low.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this firm's intrinsic value.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this firm's intrinsic value.

Our AUD 50 fair value estimate for no-moat Woodside stands. The company reported a 25% decline in underlying 2019 NPAT to USD 1.06 billion, or AUD 1.63 per share, in line with our expectations. Underlying earnings exclude a USD 720 million non-cash impairment to Kitimat LNG, following sustained depressed gas market conditions in Western Canada. A final fully franked USD 0.55 dividend is as expected in accord with the 80% payout policy bringing the full year to USD 0.91 and an effective 4.0% yield at the current AUD 33.55 share price.

We increase our fair value estimate for Woodside to AUD 50 from AUD 49 equivalent to the time value of money. The company reported fourth-quarter revenue up 16% to USD 1.45 billion, in line with our expectations. Slightly higher than anticipated production of 25.7 million barrels of oil equivalent, or mmboe, offset marginally lower than expected pricing. Woodside sells a higher proportion of its LNG into spot than, for instance, Santos or Oil Search. This is a deliberate strategy to allow greater revenue participation when prices are higher and to facilitate trading margin, something we’d agree with in the long run. But it can detract in the short term. The Japan spot price improved to USD 6.70/mmBtu in December versus July’s nadir of USD 4.70, though it is still well below the implied USD 8.50 contract. That said, the gap to contract did mercifully narrow to USD 1.80 in December versus USD 4.90 at its widest in July.

As Australia's premier oil player, Woodside Petroleum's operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a large percentage of this firm's intrinsic value.

Woodside’s leverage in a Pluto/NWSJV/Browse master plan looks to have just increased again. The company reports the contingent, or 2C, gas resource for proposed Pluto LNG feeder field Scarborough has increased by more than 50% to 11.1 trillion cubic feet, or Tcf, from 7.3 Tcf. The company’s share of the Scarborough gas resource is 75% with BHP holding the minority balance. The rule-of-thumb is that one standard 4.5Mtpa LNG train requires approximately 4.0 Tcf of gas to justify development, sufficient to support production for 20 years.

In nominal terms, our AUD 49 Woodside fair value estimate equates to a 2028 EV/EBITDA multiple of approximately 5.0. That’s after stripping out USD 5.2 billion lump sum from the EV for non-earnings-contributing resources including 2,636 million barrels of oil equivalent, or mmboe, of gas at Kitimat in Canada. On the same basis, our AUD 9.25 Santos fair value estimate equates to a similar 2028 EV/EBITDA multiple of approximately 4.7; and if you adjust for the fact Woodside’s 80% dividend payout ratio is more than double Santos’, our fair value EV/EBITDA multiples for them are effectively identical.