EUR 850.00 For Business Accounts Only

Morningstar | Woodside's 3Q Pricing a Touch Soft, but Key Expansion Concepts Progress; No Change to FVE

Our AUD 46.50 fair value estimate for no-moat Woodside stands. We have increased our 2019 EPS forecast by 24% to AUD 3.23, but only after factoring in higher near-term energy prices and a weaker Australian dollar. We now assume a 2019 Brent crude price of USD 82 per barrel and an AUD/USD exchange rate of 0.71. Longer-term assumptions, including a USD 60 per barrel midcycle Brent crude price, substantially remain.

Our 2018 EPS forecast weakens marginally, down 4% to AUD 2.12 from AUD 2.20 after softer-than-expected third-quarter revenue. This was in part due to volumes being tempered by the timing of Woodside’s equity sales, and they will be made up for. But price achievement overall was also a touch softer than expected and does affect our forecast. Pluto’s LNG achieved just USD 9.90 per mmBtu versus our USD 11.60 target. That’s an approximate 13% slope to the crude price versus a three-year average closer to 18% and our expectations of 15%. We hope this is just an anomaly.

Positives elsewhere include Bechtel being selected as the preferred engineering, procurement, and construction contractor for the second Pluto LNG train and concept definition kicking off for the Browse to North West Shelf project. These elements overall constitute about AUD 6.50 or 14% of our Woodside fair value estimate, so there is considerable comfort in their continuing progress. Assuming these don’t proceed would reduce our fair value estimate to around AUD 40, though still considerably above the current AUD 35.85 share price. It appears the market is discounting these expansions and then some. We think this is unwise with Woodside typically delivering on promises. Wheatstone LNG for example continued to produce ahead of plan in the third quarter. Woodside shares remain materially undervalued, in our opinion.

Our group fair value estimate equates to a little-changed fiscal 2027 EV/EBITDA of 11, or 7.6 if the USD 6.1 billion lump sum we credit for contingent resources is excluded.

Our fair value estimate credits 10-year revenue compound annual growth rate of 6.6% to USD 7.4 billion by 2027. This is despite our forecast for the oil price declining 30% in real terms to an unchanged midcycle USD 60 per barrel (2021 real). We still assume a near 50% increase in production to 125 million barrels of oil equivalent, or 4.0% 10-year CAGR. Most of this comes via completion of a second Pluto LNG train, assumed in 2023. Our fair value estimate implies a 2027 P/E of 27.7, price/cash flow of 16.9, and fully franked dividend yield of 2.9%, all discounted at weighted average cost of capital. Versus today’s fair value estimate, the metrics are 11.4, 6.9, and 7.1%, respectively, and sufficiently enticing.

At the current AUD 35.85 share price, the 2018 dividend equates to a handy fully franked 5.0% yield, and that in a company with no shortage of healthy growth prospects. Our 2020 production forecast for 100 mmboe remains in line with Woodside’s target. Woodside increased full-year 2018 guidance to 87-91 mmboe with the half-year result, and with the third quarter now banked, the high end looks very likely. The company delivered 44.3 mmboe of production in the first half of 2018 and 23.1 mmboe in the third quarter. Our target remains at a guidance high-end 90 mmboe.