Woodside Petroleum: Preparing for next investment phase

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
18 February 2021, 12:30 PM
Sectors Covered:
Mining, Energy

  • A difficult second half result for Woodside Petroleum (ASX:WPL), with earnings falling well short of consensus expectations.
  • 2020 EBITDAX of US$1,922m (vs consensus US$2,517m vs MorgE US$2,443m), while FCF fell into negative territory at -US$263m (vs MorgE +US$333m).
  • Woodside declared a USD 38 cent final dividend, although stated it would consider its level of dividend payout (from current 80% to perhaps policy minimum of 50%).
  • Growth projects remain reliant on Woodside’s ability to deal its equity in these projects.
  • We maintain an Add rating with a revised target price (login to view).

Tough end to a tough year

Woodside posted full year 2020 underlying NPAT of US$447m (vs consensus US$637m; MorgE US$425m). NPAT was down 61% pcp on a combination of lower revenue (-26% pcp) and significantly higher costs (+33% pcp).

This led to materially lower EBITDAX well below estimates at US$1,922m (vs consensus US$2,517m; MorgE US$2,443m) and negative FCF of -US$263m (vs MorgE +US$333m). This underperformance came as a surprise with Woodside’s profitability halving in H2 vs H1.

However we expect a rapid turnaround in earnings in 2021, with spot LNG and oil-linked prices both improving materially. Despite the lower earnings Woodside came in ahead of our dividend estimate at US38 cents (vs MorgE US36c), maintaining its recent trend of an 80% payout ratio.

Preparing for next investment phase

With improving confidence in the market, Woodside is preparing to kick off its next investment phase, focusing on the development of Scarborough/Pluto T2 (offshore WA gas tieback to Pluto) and Sangomar (offshore Senegal greenfield oil).

With current gearing at 24%, Woodside announced that it is considering lowering its dividend payout, which has averaged around 80% in recent years, back towards its dividend policy of at least a 50% payout of underlying earnings.

However we still expect Woodside may struggle to avoid raising equity if it is unable to sell down its interests in Scarborough/Pluto T2 and Sangomar. We also await further insights into management plans for Browse/NWS.

Changes to estimates

It was clear from the 2020 result that we have been too optimistic on our cost assumptions across NWS, Pluto and overheads. We have reset these in our assumptions post the result, lowering our EPS forecasts for 2021/22/23 by 24%/18%/12% respectively.

Post the changes our target price has been revised to A$28.10 (from A$28.90), still at an attractive premium to Woodside’s current share price.

Long-term value but some risks to mitigate

It is clear that Woodside needs to carefully manage its near-term balance sheet demands, in order to avoid dilution that could blunt the return profile of its growth projects for investors. However with a recovering earnings platform and potential asset sell-downs, we see this as manageable.

We maintain an Add rating with a revised target price (login to view). The key risks to our call are global macro (LNG/energy demand) and dilution risk.

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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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