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Woodside Petroleum : HY21 result in line with expectations but merger with BHP’s petroleum assets is the market’s focus

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Woodside Petroleum Ltd (ASX: WPL) is a global energy supplier that is specialised in the upstream petroleum sector. Woodside supplies oil and gas and is the largest LNG producer in Australia. Woodside’s market capitalisation is A$20.4 billion.

 

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What are the key points of Woodside Petroleum’s report?

Woodside’s underlying net profit after tax in HY21 is US$354 million (compared with US$303 million for HY20). This increase is mainly attributed to rising prices (up 24%), while sales volumes rose 6% and production costs were flat. Woodside’s gearing ratio decreased from 24.4% on 31 December 2020 to 23.3% on 30 June 2021 and is within the target range of 15-35%.

Woodside declared an interim dividend for HY21 of US$0.30 per share (US$0.26 for HY20). This represents a payout ratio of approximately 80% of underlying NPAT.

 

Is Woodside acquiring BHP’s petroleum assets?

Woodside and BHP Group Ltd (ASX: BHP) have entered into an agreement to combine their respective oil and gas portfolios by an all-stock merger. This means that Woodside will buy BHP’s petroleum assets in exchange for Woodside shares. These Woodside shares will be distributed to BHP shareholders. On completion, it is expected that Woodside will be owned by 52% and 48% of existing Woodside and BHP shareholders respectively. As a result, Woodside will become a global top 10 independent energy company by production and would be the largest energy company on the ASX. This merger is expected to deliver synergies of more than US$400 million per annum and is expected to be finalised in the first half of 2022.

As part of this transaction, Woodside and BHP have developed a plan for making a final investment decision for the Scarborough gas project located offshore Western Australia (WA) by the end of 2021, prior to the proposed completion date for the merger. In particular, Woodside and BHP have agreed an option for BHP to sell its 26.5% interest in the Scarborough project to Woodside and its 50% interest in the Thebe and Jupiter gas fields (located near the Scarborough gas field) to Woodside if the Scarborough joint venture takes a FID by 15 December 2021. The option is exercisable by BHP in the second half of the 2022 calendar year and if exercised, consideration of US$1 billion is payable to BHP with adjustment from an effective date of 1 July 2021. An additional US$100 million is payable contingent upon a future FID for a Thebe development.

 

What is the outlook for Woodside?

Woodside’s production guidance for FY21 is 90 to 95 MMboe compared with 100.3 MMboe in FY20. Production is down a little due to maintenance shutdowns. Movements in oil and LNG prices will continue to be the driving factor for Woodside’s earnings. That said, the key short term influence of Woodside’s share price will be the successful completion of acquiring BHP’s petroleum assets and achieving integration synergies.

Setting aside issues relating climate change, the medium to long-term outlook is positive as several long-term Woodside projects that should underpin future growth. Firstly, Woodside announced in January 2020 it is proceeding with the Sangomar Field Development Phase 1 (located on the west coast of Senegal, Africa) with first oil production expected in 2023. This is a high margin project and it remains on-track.

Secondly, as mentioned above, the development of the Scarborough gas field located offshore Western Australia and Pluto LNG Train 2. This project could provide significant returns post 2026.

Thirdly, assuming the merger transaction proceeds, BHP’s projects (the Atlantis Phase 3 (United States (US)), Mad Dog Phase 2 (US), Shenzi North (US)) remain on budget and on track. These projects provide significant brownfield expansion options.

Finally, again assuming the merger transaction proceeds, longer term options include BHP’s Wildling (US), Trion (Mexico), Calypso (Trinidad and Tobago) projects as well Woodside’s and BHP’s Browse Basin (WA) gas project. These options offer significant potential growth coupled with multiple exploration opportunities and partnerships.

In relation to climate change issues, Woodside has planted 3.6 million native trees on three properties acquired for this purpose in WA. These plantings are a significant addition to the quality carbon offsets that will help us achieve Woodside’s aspiration of net zero emissions by 2050 or sooner. The merger with BHP’s petroleum assets could see greater activity in addressing climate change issues.

 

What is the market reaction?

The market’s reaction to Woodside’s HY21 result and acquisition of BHP’s petroleum assets is slightly negative, with the share price down 2% to $A20.25. That said, it will take some time for the market to digest the implications of Woodside’s acquisition of BHP’s petroleum assets. Woodside trades at a forward P/E ratio in the low-teens and has a dividend yield of around 6%.

 


Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purposes only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceedings. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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