Woodside Petroleum - A difficult path to deviate from
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 16 July 2020, 11:55 AM
- Sectors Covered:
- Mining, Energy
- Along with its June quarter result, Woodside Petroleum (ASX:WPL) flagged impairments at its upcoming August result. The write downs are expected to total US$3.9bn, as well as a US$447m onerous contract provision against Corpus Christi.
- Falling earnings from lower energy prices will materially impact WPL's dividend profile. We see potential for WPL to pull back its payout ratio to 50%.
- Despite the large changes to its energy price assumptions, and large write downs, there is no apparent change in WPL's overarching growth strategy.
- Overall a better Q2 result than expected, albeit realised LNG prices plummeted.
- We maintain our Hold rating on WPL (Morgans clients can login to view detailed reports and price targets).
Achieved LNG prices fall harder than expected
Overall Woodside Petroleum (ASX:WPL) posted a steady June quarter result, with steady operational performances from key LNG operations Pluto, North West Shelf (NWS) and Wheatstone.
Group Q2 sales volumes of 27.1mmboe compared favourably to our estimate of 26mmboe.
This helped sales revenue to also beat our estimate (actual US$768m vs MorgansE US$676m) despite a much harder-than-expected plunge in WPL’s average realised LNG price.
WPL’s achieved LNG price of US$5.0/mmbtu (vs MorgansE US$6.15/mmbtu) was 38% lower on the previous quarter and fell well short of estimates.
Large impairments not much of a surprise
We had considered WPL at high risk of significant write downs given the stark difference between previous cycles and the current energy price environment, which we consider to be partly structural with a protracted negative impact on industry fundamentals.
This move was reflected in the write downs announced by WPL, reducing the carrying value of its existing oil and gas properties by US$2.76bn (80% due to downgraded energy price forecasts between 2020 to 2025) and exploration/evaluation assets by $1.16bn.
Digging its heels in
We were surprised that despite the material downgrades to its long-term oil/LNG price assumptions, WPL still plans to move ahead with unchanged growth plans that include potentially lower returning projects such as Browse (which despite being in its third iteration still appears to have a single digit IRR (return profile) on our estimates).
WPL also stated in the result that it would not consider linking its Scarborough field directly to nearby NWS, and still plans to move ahead with development of a second train at Pluto.
Focus remains on capital resources
With spot oil and LNG prices remaining at depressed levels, a capital-intensive growth pipeline (Scarborough-Pluto T2, Browse, Sangomar, etc.), and sticking out as the logical bidder for partner Chevron’s NWS stake, we see WPL as unlikely to be able to execute on all of its ambitions while maintaining a dividend, without seeking external capital.
In the short term, we expect this may result in a reduction of WPL’s payout ratio back to its policy minimum of 50% of underlying earnings (which would put WPL on a much reduced dividend yield of 1.7% in 2020).
We have lifted EPS forecasts after updating our model for the result and rolled our model forward.
With a revised target price (Morgans clients can login to view detailed reports and price targets) we maintain our HOLD rating.
The key risks to our call are commodity and potential dilution risks.
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