ANALYST’S NOTE

Woodside Petroleum (WPL) first half FY18 (1H18) result was largely in line with expectations, with underlying NPAT of $566m up +11% on pcp and sales revenue up +27% to $2.25bn.

WPL continues to progress on its key growth assets (getting them towards FID), whilst its base business continues to operate in line with expectations. Management have slightly upgraded their 2018 production guidance from 85-90 million barrels of oil to 87-91 million barrels of oil equivalent (boe), lowered their unit production cost to US$5.5 – 5.8/boe. Management again reiterated their target of approximately 100 mmboe (million barrels of oil equivalent) annual production in 2020 (versus 84.4 in 2017).

• Key updates. 1. A 5% higher production of 44.3 MMboe compared to that of in 1H17; 2. Reliability at Pluto LNGL exceeding 99%; 3. An increased Pluto LNG capacity increased by 14% on original design capacity to 4.9 Mtpa; 4. Steady production above nameplate capacity from Wheatstone Train 1 and commencement of Wheatstone Train 2 production earlier than expected; 5. Entering of a non-binding MOU for the supply of approximately 125TJ/d of domestic gas over 20-25 years (underpinned by proposed Scarborough development); 6. The long-term agreement with Pertamina approved with an expected 1.1m tonnes per annum from 2019.
• Dividend payout exceeds management target on higher prices. A clear positive from the half year results was the +20% increase in the interim dividend, which represented a payout ratio above company’s stated guidance of 80%, driven by higher commodity prices. We are likely to see this payout ratio revert back to 80% level. Given the projects in the pipeline in the medium term, we believe WPL’s board will likely consider the merits of a high dividend payout ratio. We are not entirely against such a proposition (as long as the required return on investment is achieved) but the Company has pitched itself as a yield play and any change to this view will see the share price come under pressure.
• Strong LNG global demand outlook. The outlook for LNG remains very robust. In short, data indicates the gap between supply and demand is opening earlier than expected and the investment required (but not in play) to meet this supply gap is lacking – given that it typically takes 5 years from FID (final investment decision) to supply to market. Demand from other Asia markets also is robust, which includes countries such India, Indonesia, Malaysia, Myanmar, Pakistan, Philippines, Singapore, Sri Lanka, Thailand and Vietnam. According to IHS Markit, these countries will drive a much stronger lift in LNG demand from 2020 – 2035 versus China and other developed economies in Asia.