Woodside Petroleum: Plans on having its cake and eating it too

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
03 December 2019, 1:48 PM
Sectors Covered:
Mining, Energy

  • Following Woodside’s recent investor day we have carried out a review of our assumptions across its business.
  • The key question we have considered: is Woodside’s balance sheet strong enough to fund both significant growth and support a high dividend payout?
  • Our view ultimately is that it can, so long as Woodside succeeds in lowering its interest in Scarborough and/or Pluto Train 2.
  • We continue to assume a 70% dividend payout ratio, below the current 80% but well above Woodside’s dividend policy of 50% of underlying earnings.
  • We maintain our Add rating (Morgans clients can login to view detailed reports and price targets)

Growth plans solidifying

We continue to gain greater conviction in Woodside’s growth profile, with the company expecting to continue to post steady progress towards FID (final investment decision) at both Scarborough/Pluto train 2 (T2) and Browse/NWS.

We view the progression of both projects as essential to our investment thesis on Woodside.

Meanwhile Sangomar (name change from Senegal) is also making steady progress towards an investment decision on a first phase of development.

Of critical importance, Woodside recently announced a nonbinding tolling agreement with Scarborough partner BHP Group (BHP, Hold rating) and views progression to a binding agreement in early 2020 as purely administrative.

The right balance

With gearing currently at just 13%, Woodside has maintained consistently that it plans to increase its use of cheap debt (target range 15-35%).

Combined with high margin existing operations, we expect Woodside will be able to support heavy investment in Scarborough/Pluto, Browse and Sangomar while still maintain a dividend payout ratio of 70%.

We expect achieving this ambitious goal will largely depend on Woodside’s ability to sell down its interests in Scarborough and/or Pluto T2 to its targeted 50% ownership.

Even on a low oil price scenario (-20%), this would see Woodside’s gearing remain within its preferred gearing range with gearing of 35% reached in 2022 on our estimates.

What happens next

We expect a binding tolling agreement at Scarborough to be announced early in 2020, followed by the project reaching FID during the first half of 2020 (with potential news of a farm down of Woodside’s interest throughout).

With Scarborough progressing, Woodside now expects the Browse development to start to gather pace with a processing agreement between the Browse and NWS joint ventures expected around year end.

Meanwhile in Senegal, arbitration over Woodside’s purchase of its stake continues, where we have no special insights but view a reversal of Woodside’s interest as extremely difficult to imagine given its role as operator and the magnitude of sunk capital since its entry into the project.

Valuation upgrade

Updating our model for the new details around Scarborough/Pluto T2, Browse and Sangomar has seen our valuation-derived target price increase (Morgans clients can login to view detailed reports and price targets). As a result we maintain our Add rating on Woodside. The key risk to our call is oil price and project execution risk.

More information

Morgans clients can login to view our detailed report and share price target for Woodside Petroleum (WPL). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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