Woodside Petroleum: Jumps ahead on energy transition

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

09 December 2021, 8:00 AM

Sectors Covered:

Mining, Energy

• Rather than keeping pace with industry, Woodside Petroleum (ASX:WPL) is eager to step out ahead deploying capital into New Energy (renewable and green energy resources).
• The aim is to invest US$5bn by 2030 if it can complete the BHP Petroleum merger.
• Initial opportunities being sized up include hydrogen, green ammonia, and solar.
• Early capital deployed into emerging markets is invariably inefficient with both producers and customers having to feel their way forward through trial and error.
• We do not see any advantage in being an early mover, but if WPL can execute it will receive a sizeable ESG bump (even if diluting some of its earnings power).
• We maintain our Add rating with an unchanged (login to view) target price.

Event: Investor Update 2021

The dominant focus of WPL’s Investor Update was on ESG (mainly E), with WPL following a trend of some resource players making similarly big moves.

If the merger with BHP Petroleum is completed, WPL plans to spend US$5bn by 2030 on New Energy. Starting with looking at four projects: H2Perth (hydrogen/ammonia), H2OK (hydrogen), H2TAS (hydrogen) and Heliogen (solar).

In revisiting the hurdles it sets for new projects, WPL outlined target returns for offshore oil (IRR >15% and payback <5 years), LNG and pipeline (IRR >12% and payback <7 years) and New Energy (IRR >10% and payback <10 years).

What is clear, even according to WPL’s own hurdle rates, is the further WPL transitions its business away from offshore oil and towards New Energy, the more it will see its earnings power gradually eroded.

Given the grassroots stage of most New Energy resources and services, and the rush of new entrants into the space, we see real risk around WPL’s ability to execute and achieve the modest hurdles it has set for New Energy.

What is unclear is how much the push into New Energy will boost WPL’s ESG profile with investors. Which could prove material to our investment thesis.

Analysis: New Energy push looks aggressive

The move marks a material change for WPL’s business. Diversifying away from traditional hydrocarbons where it has developed core competencies and into renewables/green energy at the ground level, where it is starting from scratch.

WPL argues that moving early will give it an early mover advantage with customers, which could be true, but we expect the more likely outcome to be competitive pressures in renewables swells by the time WPL is prepared to add scale (2030+). This risks blunting the return profile of New Energy.

The bigger change will still come from the merger of WPL with BHP Petroleum. This will immediately expand WPL’s hydrocarbon production, while adding much needed geographical diversification.

We will not have to wait long for new growth from the BHP portfolio, with the Trion field in the southern Gulf of Mexico on track to reach FID (final investment decision) around the time of the merger completion. WPL is confident it will be able to sanction Trion without impacting the schedule.

Forecast and valuation update

At this stage we do not attribute any value to WPL’s New Energy opportunities prior to them being sanctioned and more detail is known.

Investment view

It is encouraging to see WPL taking ESG seriously. And WPL’s strong group fundamentals can survive a long-term incremental erosion in earnings quality. But what is harder to be in favour of is the size of investment WPL plans in areas outside its established core competencies.

The balance remains in support of our positive investment view on WPL. We maintain our Add rating and (login to view) target price.

Price catalysts

BHP Petroleum merger.

4Q21 operational and sales result.

Risks

COVID-19 related risks to global energy demand.

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