A safe pair of hands
We see Woodside Petroleum (WPL) as a safe pair of hands in a sector that has been oversold. In our view WPL offers a sector-leading earnings profile coupled with a healthy balance sheet and friendly dividend policy (currently paying 80% of EPS). We believe WPL is in a unique position to weather ongoing volatility while positioning itself for its next leg of growth.
Strong quality of earnings...
At first glance WPL might look expensive, given its share price has strongly outperformed oil prices recently (WPL down -15% versus Brent oil price -31% quarter on quarter). But that view ignores the strong position WPL has worked itself into. WPL is vastly more profitable with an EBITDAX margin of 72% (FY18F) versus its major global energy peers on 37%, has lower gearing of 23% versus global peers on 30%, and is trading on an EV/EBITDAX of 9x versus major global peers on 17x against a potential FY19F dividend yield of +6% fully franked.
WPL's low-risk operations, high margins and healthy balance sheet leave the company ideally positioned to weather ongoing volatility.
...and can now couple this with growth
A shortcoming in our previous WPL investment thesis was the absence of growth, with the company holding a portfolio of low returning capital intensive undeveloped projects. However, we see an improving outlook in medium-term LNG market fundamentals (supported by stronger-than-anticipated demand growth) as supporting a picture where more of WPL's key undeveloped projects will become 'sanctionable'. Chief among these are:
- Browse (tie back to NWS to help offset declining gas feed);
- Scarborough (supported by Exxon's departure from the JV paving the way for it to feed Pluto T2); and
- Kitimat LNG (with Canada's LNG industry in our view sitting right on the marginal cost level for LNG projects).
Updated oil price forecasts and investment view
We have flushed through lower 2019 oil price forecasts and higher long-term sustaining forecasts (with the latter immune from current volatility). Surging DUCs (drilled but uncompleted wells) observed in the US shale industry and commentary from OPEC and Russia point to a swift supply response in the oil market that should limit the duration of current oil price volatility. This call is the key risk to our recommendation on WPL.
Following recent share price weakness across the energy sector we upgrade our recommendation for Woodside Petroleum (WPL) from Hold to Add.
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