WDS - Woodside Energy: Scarborough Means Growth Is Secular

2023-09-21 05:15:32 ET

Summary

• Woodside Energy Group has a solid pipeline to support long-term production growth.
• The commodity situation has improved for them since the H1 and enduring conditions for higher gas and oil prices remain.
• WDS' dividend is ample and sustainable, and their sequential results are going to look good as we approach the end of the year.

Woodside Energy ( WDS ) is going to benefit in 2026 and onwards from the massive production from Scarborough. And until then, a strong situation in their recently grown oil business, after acquiring BHP Petroleum as well as a new normal for gas prices, should support the dividend around current levels. We also believe the geopolitical setup for the commodities is highly durable and will continue to offer downside protection as key interests want oil prices high. The underlying commodities are ultimately volatile, but directionally Woodside looks good, even if Japan Petroleum Exploration ( OTCPK:JPTXF ) will always be better.

H1/Q2 Breakdown

Since the merger with BHP's ( BHP ) petroleum business, Woodside is vaguely 50:50 between oil and gas now, where it was about 70:30 gas to oil before. Its profile is quite different from before. Gas prices had come down more harshly YoY compared to oil prices in the H1. The BHP merger closed around June of last year, so the current H1 2023 breakdown is being massively impacted by the inorganic addition of BHP.

In the BHP Petroleum acquisition, assets in oil more or less doubled from before, and the overall impact was to increase run rates by about 30%. This matches up with the growth we are seeing in Q2 in production, which is 32% . The revenues are actually down, reflecting the blended average of around 30% declines in gas and oil YoY.

Looking Forward

These declines will be very short-lived, given where oil prices are now. Gas prices have also stabilized . Run-rate production will not be increasing incrementally post-BHP Petroleum, but prices have increased meaningfully. We expect around 10-20% increases in revenues sequentially in the H1, driven by oil. Gas is around H1 averages at this point in price.

We think gas may get a pickup if the winter is colder than expected since last year Europe got off easy with a mild winter despite the end of Russian-European integration. More importantly, we think the current prices for oil are going to remain. While risks to the oil price include surprises from Iran and Venezuela, who may be convinced to alleviate the situation in oil prices, plenty of oil-rich governments are very happy to be putting the US and the Biden administration in particular in a bit of a bind, with the hopes that someone else takes over who will be more amenable than he has been.

Sangomar will start contributing in 2024, and in 2026 we get Scarborough coming online. A precedent transaction values the project at around $8.8 billion, where WDS sold 10% of the project for an $880 million consideration. By 2031, production from WDS will have grown 50%, and the growth will be rather steady from now with Scarborough likely to ease into the production mix after first production.

Incremental price strength, particularly in oil, will help sustain the dividend close to 10%. Over time, production will grow thanks to major projects in the pipeline. Besides the obvious political risks and volatility in the commodity prices, we are clearly in a new normal given the intrusion of large-scale geopolitics on these commodity markets. Things look decent at the current price and dividend yield.

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