Morningstar | Woodside Sensibly Banks Franking with Large Dividend Payment. No Change to AUD 46.50 FVE.
We make no change to our AUD 46.50 fair value estimate for no-moat Woodside. The company reported a strong 50% increase in underlying NPAT to USD 1.42 billion, 6% below our more bullish USD 1.50 billion expectation. Net operating cashflow of USD 2.74 billion, however, was in line with expectations. The modest NPAT miss was due to slightly higher than expected unit operating costs, which on our measure came in at USD 12.75 per barrel of oil equivalent, versus the USD 12.25 per boe we anticipated. We see no material consequence going forward and our longer-term assumptions stand; including 40%-plus production growth to 130 million barrels of oil equivalent, or mmboe, by 2024, a midcycle Brent crude price of USD 60 per barrel, and midcycle operating costs of USD 10.30 per boe. These support a healthy 4.5% 5-year EBITDA CAGR to USD 4.7 billion by 2023 versus 2018’s USD 3.8 billion. The key driver of assumed production growth is the Pluto/Scarborough LNG expansion. Our fair value already fully credits AUD 5.00 per share for a second Pluto LNG train.The surprise of the 2018 result was payment of an outsize USD 0.91 final dividend versus our USD 0.81 forecast. The 100% payout ratio is well ahead of the unchanged policy of paying out 80% of underlying earnings, and brings the full-year dividend and payout ratio to USD 1.44 and 93%, respectively. Woodside justified the higher payout on stronger than originally budgeted production and oil prices in 2018, but also because its large franking balance is at risk from potential regulatory changes with the federal election looming. We applaud the move, which speaks to the quality of management though not to the point of shifting our Standard stewardship rating.
The market approved, the shares up 2.1% to AUD 35.60 on the day and at that price equating to an attractive fully franked 5.6% yield. However, we don’t anticipate that dividend to be matched again until 2023 given likely return to 80% payout and softer oil prices.
Woodside shares remain cum dividend until the Feb. 22 ex-date, with payment slated for March 20, and materially undervalued. Our group fair value estimate equates to a little changed fiscal 2028 EV/EBITDA of 11, or 8.1 if the USD 6.1 billion lump sum we credit for contingent resources in Kitimat Canada, Senegal and elsewhere is excluded. Our fair value credits 10-year revenue CAGR of 3.3% to USD 7.6 billion by 2028. Our fair value estimate implies a 2028 P/E of 27, price/cash flow multiple of 23.4, and fully franked dividend yield of 3.1%, all discounted at a WACC of 9.3%. Versus today’s fair value estimate, the metrics are 11.5, 9.6, and 7.5%, respectively, more enticing.
Woodside’s growth strategy looks to be increasingly well aligned with market conditions. It points to growing demand for long-term gas contracts, including a 40% increase in Chinese LNG demand. Asian growth is being driven by clean air policies and urbanisation while European growth is driven by rising carbon prices and declining domestic supply. Woodside notes 230Mtpa of additional LNG supply will be required by 2030. This is in broad step with our own views, including those expressed in our China Oil & Gas Observer of Nov. 5, 2018. Woodside is preparing for final investment decisions on its Pluto Train 2 and Browse gas projects in 2020.
Woodside’s balance sheet remains strong, net debt of USD 2.4 billion down from USD 3.0 billion at end June 2018 and USD 4.7 billion this time last year. Net debt/EBITDA is just 0.65, positioning Woodside appropriately for capital expenditures coming up. However, even maintaining the 80% payout ratio, we still only project peak net debt/EBITDA of just 1.5 in 2022 and rapid return to sub-1.0 levels by as soon as 2024. Current debt facilities have a favourable five-year average duration of which the drawn fraction has even higher 6.5-year average duration. Cost of debt is a competitive 3.9%.
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.
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