Woodside Petroleum (WPL)Company overview: Woodside Petroleum is...

Woodside Petroleum (WPL)

Company overview: Woodside Petroleum is the leading Australian LNG producer, with significant Western Australia-based conventional oil and gas operations. The company has generated strong cash-flows since the commissioning of Pluto in 2012. The company has significant growth potential, as evidenced by its undeveloped reserve position, via key projects such as Browse and Scarborough, in anticipation of continued growth in demand for cleaner gas fuels, as well as its conventional oil Sangomar field in Senegal.

Valuation & market reasoning: We value Woodside at AUD29.96 per share, within a range of AUD18-40/share, based on its sustainable free cash flow under a range of scenarios. The company has underperformed due to concerns over its declining production profile, coupled with the demand interruption driven by COVID-19. At USD42 spot oil, WPL is cash-flow positive, yielding 4%, rising to 11% should oil demand recover, and 18% if supply declines. Our bull case reflects under-investment outside of the US and ironically becomes more likely the longer prices stay low. On this basis the risk/reward skew is very favourable even if oil prices drift lower in the short-term.

Merlon view: We believe the market is underappreciating the long dated value of its growth optionality in light of recent acceleration in China’s pollution-driven demand for gas fired generation, coupled with an expected long term crude oil price, which forms the basis of its LNG contract pricing, being supported at USD60-70/bbl. We see upside to this price from a phase of underinvestment in conventional oil and gas globally, and more recently across US unconventional oil and gas activity.