Improved Woodside outlook underpinned by currency, not oil
Morningstar increased its share price outlook for Woodside Petroleum following its reported US$ 566 million in profits for the half-year ended 30 June, 2018, up 12 per cent on last year.
Mentioned: Woodside Energy Group Ltd (WDS)
Morningstar increased its share price outlook for Woodside Petroleum (ASX: WPL) following its reported US$ 566 million in profits for the half-year ended 30 June, up 12 per cent on last year and 6 per cent higher than the previous half.
However, the decision to boost the fair value estimate of Australia's biggest oil and gas player is based on currency movements rather than a change in long-term operating assumptions or oil and gas prices, according to Mark Taylor, senior equity analyst, Morningstar Australia.
The result was "about 4 per cent shy of our forecast, however, the small miss reflects chiefly a higher-than-anticipated effective corporate tax rate of 32 per cent, due to timing issues," Taylor says.
Morningstar's earnings per share forecast "improved marginally" again due to the weaker Australian dollar, which offset any first-half earnings shortfall.
The reported 53 US cents a share dividend for the half was in line with expectations, "but the more favourable dollar translation sees our full-year dividend-per-share increased 3 per cent to $1.77, from $1.72," Taylor says.
"At the current share price, the 2018 dividend equates to a handy fully franked 5 per cent yield, and that in a company with no shortage of healthy growth prospects."
Currency moves rather than production improvements underpin our fair value change
Taylor also highlights the positive effect net operating cash flow growth has had on management's debt reduction strategy. This increased 22 per cent to US$ 1.2 billion, around 10 per cent ahead of his expectations, in turn boosting the company's rate of debt reduction, with net debt reduced to US$ 3 billion.
On the back of the result, Woodside management raised its 2018 production outlook after strong performances from its Wheatstone and Pluto LNG projects.
Production was spurred by a ramp up at the Wheatstone liquefied natural gas project in Western Australia. The plant's second production unit started up in mid-June and is ramping up as planned, according to Woodside management.
Woodside also said it expects to reach a preliminary tolling agreement between the North West Shelf Project participants and Browse joint venture in the third quarter of 2018.
Browse is seen as an important source of growth for Woodside but has been on the drawing board for years, as plans for onshore and floating LNG development estimated at $US30 billion to $US45 billion were scrapped.
Woodside now expects production for the 2018 fiscal year to rise to between 87 million and 91 million barrels of oil equivalent (mmboe) – up from the earlier estimate of 85 mmboe to 90 mmboe.
Looking further ahead, Taylor says Woodside's 100 mmboe production target for 2020 is "in line with our own, before we forecast growth to 130 mmboe from 2024".
Woodside delivered 44.3 mmboe of production in first-half 2018 and increased full-year 2018 guidance to 87-91 mmboe from 85-90 mmboe.
"Our target stands at 91 mmboe, already slightly above guidance [from management]," Taylor says.
Shares in Woodside were trading at $36.09 at last close, a 23 per cent discount to Morningstar's $46.50 FVE.
More from Morningstar
• Make better investment decisions with Morningstar Premium | Free 4-week trial
Glenn Freeman is senior editor, Morningstar Australia.
© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.
