Woodside Petroleum: Wheatstone disappoints
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 23 October 2021, 1:30 PM
- Sectors Covered:
- Mining, Energy
- A mixed 3Q21 result, with news of a sizable downgrade to Wheatstone reserves a key highlight.
- More work is needed to understand the impact of the downgrade, but it is reasonable to assume the material decrease in developed 2P brings forward planned capex spend and shortens Wheatstone’s life.
- 3Q21 results were mixed but group numbers were close to our estimates.
- Talks are underway on a possible 40-50% sell-down of equity in Sangomar.
- We reduce our target price (login to view) for the Wheatstone downgrade, but maintain our Add recommendation.
Mixed 3Q result
A strong performance once again from Pluto was almost enough to offset a weaker quarter from NWS (major maintenance) and Wheatstone (turnaround). Group 3Q21 production of 22.2mmboe was 2% below our estimate, with WPL maintaining 2021 production guidance of 90-93mmboe.
3Q21 sales revenue of US$1,531m was 19% higher qoq, driven by stronger prices, with an average realised price of US$59/boe +28% qoq.
Along with the 3Q21 result, WPL also downgraded Wheatstone reserves; lowering 2P developed reserves from 86mmboe to 26mmboe (-70%) and total 2P reserves from 231mmboe to 168mmboe (-27%). New 4D seismic plus drill results from Julimar-Brunello Phase 3 discovered significantly less gas than previously estimated.
The implications of the results are still being determined by the JV but it is a reasonable assumption that it will shorten the life of Wheatstone while also bringing development capex forward.
In the 3Q21 result WPL outlined that talks around possible Scarborough and Pluto T2 sell-downs are progressing, particularly equity in Pluto T2, which WPL maintains it plans to sell down prior to declaring FID on Scarborough-Pluto T2. FID is still expected to be on track for year end.
WPL also commented that it is in talks with the aim of selling down 40-50% of its equity interest in the Sangomar oil project (Senegal). This would reduce the required capex while also increasing Sangomar’s risk weighting.
Surprising in the result was the absence of detail on trading activities, which WPL previously commented would be high this half.
Against extreme spot LNG prices, WPL expects spot volumes to increase in 4Q21 to 17%.
Wheatstone only represented 13% of our WPL valuation (now 11%), equivalent to a A$0.87ps reduction in valuation. While disappointing, this is not significant enough to undermine our positive view on WPL.
Meanwhile, any successful sell-down in equity for Pluto T2, Scarborough or Sangomar would likely have an offsetting positive valuation impact of increasing project confidence.
Forecast and valuation update
We have updated our forecasts for the 3Q21 result, including increasing medium-term Wheatstone capex and reducing its assumed life.
Net of these changes our valuation has decreased to (login to view target price).
The reserve write-down was a negative, but on a non-core asset. We continue to see attractive value on offer in WPL’s base business, with further upside potential on offer from a potential de-risking of Scarborough and Sangomar in addition to the possible value upside from completing the merger with BHP Petroleum.
WPL/BHP Petroleum merger (2Q22).
Project equity sell-down and Scarborough FID (year end).
COVID-related risks to demand for energy resources. Completing BHP merger.
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