The portfolios recently received the in-specie distribution of WDS stock consideration for the company’s acquisition of BHP Petroleum. We added to this initial WDS position, increasing the portfolio’s existing exposure to the energy sector, previously held solely through Santos.
The all-scrip merger has significantly reduced Woodside’s balance sheet gearing to less than its target range of 15-35% at a time when its LNG growth project economics and price outlook have considerably improved. For example, its major growth project, Scarborough LNG has lowered its break-even to less than US$6/mmbtu and still has 50% of its proposed output un-contracted. WDS also has capacity to execute on its plans to deploy US$5b into it three identified hydrogen projects and thermal solar in Heliogen by 2030. Fixing the balance sheet and addressing growth project economics solves two of our major concerns for Woodside’s ability to grow production and returns.
Market conditions and the medium- term outlooks for LNG (44% of 2023e production), oil & condensate (36%) and natural gas (20%) have continued to firm in the lead up to merger completion, but the WDS share price quarter to date return was -1.1% versus the energy sector’s 6.2%. Some 25% of Woodside’s 2022 LNG production is sold into strong spot markets with the balance on oil price linked contracts. Concern about the overhang of WDS shares now held by BHP shareholders has likely also caused WDS to underperform its global peers since the merger was announced.
Europe is switching to LNG to displace its exposure to Russian pipeline gas and had already included gas in the European Council’s energy transition taxonomy, with estimates for European LNG demand to increase to ~150mtpa by 2030. This diverts LNG from the Asia Pacific basin into which WDS primarily exports, which itself is expected to continue to grow by as much as 60% over the decade to 2030. Both Woodside and Santos are well positioned to grow production into these tight LNG markets.