Reporting Season

Woodside's result was slightly weaker from an earnings perspective on the back of increased costs from the extended Pluto shutdown which took longer to restart. This flowed through to a dividend of 36cps which was down on the prior period.

Production guidance is heavily weighted to the second half, even to the bottom end of the guidance range, and is dependant on improved performance from Pluto LNG and smooth restart of the Greater Enfeld Area (post refurbishment).

The company has a lot of balls in the air with regards to negotiations with joint venture partners for tolling agreements in NWS and Pluto especially. Management highlight that these need to get resolved within the next 6 months so the projects can move forward given increasing emergence of new competing global LNG projects.

Supported by strong long-term fundamentals for the commodity

The longer-term fundamentals for the global LNG market remain sound. Consensus forecasts for demand are robust with CAGR close to 5% through to 2030, driven by emerging Asia. We think there may be upside to this, especially given China’s environmental push to switch from coal to gas. In our view China will become the globe’s leading demand source in 2021, overtaking Japan.

This ultimately means that brownfield opportunities with existing infrastructure (i.e. less capital intensive – LNG projects are multi-billion dollar investments), and are close to this demand-pull will ultimately make economic sense. Both Woodside’s Browse and Scarborough projects meet these criteria. 

The uncertainty over timing here (FID due 2025) is created by the near term depressed nature of the LNG spot price which is making commercial joint venture negotiations (i.e. liquefaction tolling rates, and offtake agreements) problematic. 

If they are not pushed out, the timing of both these projects coming online will correspond with the market going into deficit which should reduce any risk of the price on any uncontracted remainder.

The next twelve months for Woodside

Global macroeconomic concerns have clearly been weighing on the oil price and we would expect that to continue to drive volatility in the near-term. Despite this, demand for oil currently remains robust, and the lack of investment in replacement reserves outside of OPEC and US Shale should also provide some supply-side support to the oil price.

Over the last 3 months, Woodside has underperformed its 2 key peers by ~5% and we would expect that to change as investors should start to price in the key growth projects in Burrup Hub interconnector pipeline, Browse, Senegal and Scarborough. 

We expect a more positive news flow with regards to these projects later in the year, potentially at the investor day, which is in November (usually in May). The company is already well capitalised to deliver on these expansions and the dividend yield backed by the strong balance sheet provides the best downside protection in the space. 

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Comments

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andrew mccarthy

Senegal is not locked in .. and likely a third " strike " for Current CEO a win by FAR on this issue is a distinct probability