Woodside Petroleum: Plans on having its cake and eating it too
About the author:
- 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
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.
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.
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.
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