Morningstar | Bottom Falls Out of Woodside’s 2Q Production and Revenue, but Our AUD 46.50 FVE Stands
We make no change to our AUD 46.50 fair value estimate for no-moat Woodside despite downgrading our 2019 EPS forecast by 7% to AUD 2.41. We lower our 2019 production target to 88 million barrels of oil equivalent, or mmboe, from 89 mmboe, at the bottom end of recent 88 to 94 mmboe guidance. But we don’t see longer-term consequence in the surprisingly soft second-quarter operational figures contributing.Group second-quarter production fell 20% to 17.2 mmboe. We expected a large decline given planned Pluto maintenance. But even allowing for an extension to this activity, Pluto LNG output fell by a greater-than-anticipated 64% to 437 kilotonnes. This was only partially offset by stronger-than-anticipated performance from the NWS/JV and Wheatstone.
Revenue fell by an even greater 42% to USD 836 million. Again, a sharp decline was anticipated given softening hydrocarbon prices, but the magnitude regardless surprised. Inventory-build and lower than expected LNG pricing featured. The average Pluto LNG price fell 17% to USD 8.60 per million British thermal units, or mmBtu, and achieved NWS/JV pricing fell 24% to USD 7.10. But timing of shipments and very soft Asia spot prices clearly worked against. The spot LNG price into Asia plumbed USD 5.30 lows in May but had recovered to USD 7.50 by June. The contract-relevant one-quarter lagged Brent price actually rose 4% to USD 65.45 per barrel.
At AUD 34 we still think Woodside is materially undervalued, the market underpricing for growth potential. More concrete progress on key expansion projects Scarborough/Pluto and Browse/NWS/JV could be the key catalyst for a share price rerate to fair value. The chief underpinning of production growth remains construction of a second Pluto LNG train, added to by this year’s restart of Enfield oil production. We credit commissioning of the second Pluto LNG train from 2024, adding over 38 mmboe in annual production, a 42% increment on current 90 mmboe group output.
Spot LNG prices over the longer term have traded on average at a 5% discount to contract. But May spot levels were abnormally at a near 40% discount to a rising USD 9 oil-linked contract price. Near-term excess supply, including from new U.S. projects, and weak demand conspire against spot pricing; although the LNG market will need new supply from 2022. We don’t think current spot prices are in any way indicative of the long-term potential for LNG markets. We determine the price required to incentivise sufficient new capacity to balance the market is about USD 8.50 per million British thermal units, in line with our midcycle price outlook at USD 60 per barrel Brent.
Our fair value equates to an unchanged 2028 EV/EBITDA of 8.0, excluding the USD 6.1 billion lump sum we credit for contingent resources in Kitimat, Canada, Senegal, and elsewhere. We credit 10-year EBITDA CAGR of 4.8% to USD 6.0 billion. This presumes a 44% increase in group production to 130 mmboe by 2025, at a midcycle Brent crude price of USD 60 per barrel in 2022 dollars.
Despite the associated capital expenditure program due to the accompanying Scarborough field development and second LNG train, strong cash flows and a healthy balance sheet should support ongoing dividend payments. We project peak net debt of almost USD 7.0 billion in 2024, but net debt to EBITDA of just 1.5, and falling to sub-1.0 by 2026. This includes a sustained 80% payout ratio and a five-year average dividend of over AUD 1.80 per share or plus 5% fully franked yield at the current share price.
Woodside Petroleum is engaged in hydrocarbon exploration, evaluation, development, production and marketing. Co.'s operating segments include: North West Shelf Project, which is engaged in the exploration, evaluation, development, production and sale of liquefied natural gas, pipeline natural gas, condensate, liquefied petroleum gas and crude oil from the North West Shelf ventures; Pluto LNG, which is engaged in the exploration, evaluation, development, production and sale of liquefied natural gas and condensate in assigned permit areas; Australia Oil; Browse FLNG; and Wheatstone LNG. As of Dec 31 2015, Co. had proved reserves of 1.15 billion barrels of oil equivalent.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.