2023-07-05 13:53:00 ET
Summary
- Woodside Energy Group's merger with BHP Group's petroleum assets has resulted in a well-funded LNG giant, with investors enjoying a 24% total return in the past year.
- Woodside's diversified global portfolio and new production projects are expected to boost production in the coming years, with 2023 production expected to grow 17% YoY.
- However, lower commodity prices are expected to result in lower revenues, earnings, and dividends for Woodside in 2023, leading to a downgrade to hold.
It's been a year since I introduced my coverage of Woodside Energy Group ( WDS ) to investors. When I first wrote about Woodside, it was just completing the merger of its business with the petroleum assets of BHP Group ( BHP ), creating a well-funded LNG giant in the process. Investors who heeded my advice to accumulate shares would have enjoyed strong 24% total returns in the past year (Figure 1).
Figure 1 - WDS has delivered strong total returns in past year (Seeking Alpha)
However, since I initially wrote about Woodside, energy prices have corrected significantly, with natural gas prices now sub-$3/mmbtu from over $9 and crude oil trading 30% lower at ~$70/barrel. Does the re-pricing of commodity prices change my bullish view on Woodside?
Brief Company Overview
Woodside Energy Group is a leading independent E&P based in Australia. Its recent merger with BHP Group's petroleum assets increased the scale and diversification of its global portfolio, which now encompasses LNG assets in Australia, oil assets in the Gulf of Mexico, and other exploration and development projects.
2022 Was A Bonanza Year
At the time of the BHP merger, management was expecting ~$12 billion in revenues and $6 billion in operating cash flow (Figure 2).
Figure 2 - WDS management expectations at BHP merger (WDS Investor Presentation)
However, 2022 turned into a bonanza year for Woodside, as it realized higher production volumes with the inclusion of BHP's assets and enjoyed an exceptionally strong pricing environment. In 2022, Woodside delivered production volume of 158 MMboe, up 73% YOY, and generated $16.8 billion in revenues and $6.5 billion in free cash flow, significantly ahead of management's plan (Figure 3).
Figure 3 - WDS delivered an exceptional 2022 (WDS 2022 Annual Report)
And Shareholders Were Well Rewarded
The bonanza earnings from 2022 allowed Woodside to pay a final dividend of $1.44/share. Combined with a September 2022 semi-annual dividend of $1.09/share, WDS shareholders received a total of $2.53/share in dividends in the past 12 months, or a trailing 10.9% dividend yield (Figure 4).
Figure 4 - WDS paid a strong 10.9% trailing dividend yield (WDS Investor Presentation)
The increase in annual dividend was well expected, at least by me:
While I am reluctant to hazard a guess at the dividend rate until management updates their guidance in an upcoming earnings release, for comparison's sake, in 2021, Woodside Energy paid US$1.35 in dividends, which would translate to a 6% dividend yield at current stock prices. With higher energy prices in 2022, I would expect a higher dividend as well.
Commodity Prices Have Declined Dramatically In Recent Months
However, going forward, revenues and earnings may be less robust, as commodity prices have corrected significantly in the past few months. For example, in the recently reported operating update, Woodside reported a 4% QoQ decline in production but a 16% QoQ decline in revenues, as realized prices softened significantly in 2023 (Figures 5 and 6).
Figure 5 - WDS Q1/23 operating update (WDS Q1/23 Operating Update) Figure 6 - Realized prices have declined significantly (WDS Q1/23 Operating Update)
In fact, fears of a global economic slowdown have caused Brent crude to trade near multi-year lows, despite OPEC+ cutting production to try to boost prices (Figure 7).
Figure 7 - Brent crude trading near multi-year lows (StockCharts.com)
So looking forward, realized pricing may take another step down in Q2 for Woodside.
Growth Projects Set To Boost Production In Coming Years
On the positive side, Woodside continues to make headway in bringing new fields into production. First, in the near term, phase 2 of the Mad Dog project was recently completed and will ramp up throughout 2023. Woodside holds a 23.9% non-operatorship in the Mad Dog project that is expected to produce 140 Mboe/d of oil and 75 MMscf/d of natural gas.
Next, phase 1 of the Sangomar field in offshore Senegal is 82% complete and is expected to produce first oil by the end of 2023. Woodside is the operator of Sangomar and has an 82% interest in the project that is expected to produce 100 Mboe/d of oil once complete (Figure 8).
Figure 8 - WDS growth projects currently under development (WDS 2022 Annual Report)
The other significant growth project in Woodside's portfolio is the Scarborough offshore gas field in Australia. Scarborough development continued to progress, with 86% of the upstream pipeline manufacturing completed and manufacturing of the subsea structures commenced. However, Scarborough remains a longer-term project, with only 30% of the project completed and the first LNG cargo not expected until 2026.
Finally, on June 20, 2023, Woodside also greenlighted the development of the Trion project in the Gulf of Mexico in partnership with PEMEX (Mexican state-owned oil company). Trion is a large offshore oil field with an estimated 479 MMboe of contingent resources that is envisioned as a 100 Mboe/d floating production platform. Trion is expected to deliver greater than 16% IRR with a payback period of less than 4 years at a capital cost of $7.2 billion ($4.8 billion to Woodside plus carry of PEMEX of approximately $460 million).
Expect Softer Results In 2023 From Lower Commodity Prices
Overall, Woodside is guiding to 180-190 MMboe of production in 2023, which will be a 17% growth YoY compared to 2022 at the midpoint (Figure 9).
Figure 9 - WDS 2023 guidance (WDS 2022 Annual Report)
But given the 20-25% decline in commodity prices so far in 2023, I fear headline revenues and earnings may show a decline YoY for Woodside, despite the strong production growth.
Assuming realized prices of ~$75-80/boe, Woodside may see revenues of $13.5 billion to $15.2 billion. A $75-80/boe pricing environment would most resemble Woodside's 2021 results, when the company saw a 28% net margin. Therefore, I expect Woodside to report ~$4 billion (28% net margin) in net profits for 2023, or approximately $2.10/share (with 1.9 billion shares outstanding).
Furthermore, given the company's plan on paying 50-80% of net profit after tax as dividends and lowered expected earnings, shareholders should not be surprised by a YoY decline in dividends in 2023 (Figure 10).
Figure 10 - WDS is expected to pay 50-80% of net profits as dividends (WDS 2022 Annual Report)
An 80% payout ratio on my $2.10 estimate would argue for $1.68/share in dividends, or a 7.2% forward yield. A 50% payout ratio would be a 4.5% forward yield.
Technicals Remain Bullish
Technically, Woodside shares continue to grind higher in a wide uptrend that has been in place since the COVID lows. As long as price action remains within this channel, I remain constructive on WDS shares technically (Figure 11).
Figure 11 - WDS shares still within uptrend (Author created with price chart from StockCharts.com)
However, investors need to be careful that if WDS does break out of the channel to the downside, then any drawdowns could be steep and fast, as it will most likely be due to recessionary fears.
Risks To My Estimate
On the upside, positive developments in European gas markets, for example, the Netherlands is expected to close the Groningen gas field by the Fall, could lead to an increase in demand for LNG shipments, which may help realize prices for Woodside at the margin (note, most LNG shipments are sold in long-term contracts, so short-term surges in prices may not have a large impact to producers like Woodside).
On the downside, even multiple production cuts from OPEC+ have not been able to stem the grind lower in crude oil prices. A further slowdown in the global economy may put additional pressure on commodity prices and cause oil to finally 'crack' critical support near $70.
Conclusion
While I still like the growth profile of the company, I am downgrading Woodside to a hold due to weakening commodity prices. I believe lower commodity prices will cause WDS to report lower revenues, earnings, and dividends in 2023, which will be a headwind for the stock.
I will use the technical uptrend as my guide for an exit. If WDS breaks below the uptrend currently at ~$22, then I will exit my position.
For further details see:
Woodside Energy: Downgrade To Hold; Watch Uptrend For Exit