Woodside Petroleum, Australia’s largest oil and gas producer, has announced a triple digit jump in profits and the highest dividend since 2015 amid a global surge in energy prices.

Net profit after tax (NPAT) was US$1.98 billion for full-year 2021, turning around from a loss of $US4 billion the year before. Stripping out one-off items, underlying NPAT soared 262% to US$1.62 billion. Bumper profits reflect a seven-year high of US$60.85 in realised prices for Woodside’s exports of liquified natural gas (LNG) and oil.

Replenished coffers strengthen Woodside’s (ASX: WPL) balance sheet ahead of the billions in spending planned for its Scarborough/Pluto Train 2 mega-gas project off the coast of Western Australia, says Morningstar energy analyst Mark Taylor.

“Balance sheet strength remains a key appeal of Woodside,” he says.

“The company’s low net debt to earnings levels affords it the luxury of seriously pursuing growth counter cyclically, where others focus on survival alone.”

“And despite expansionary capital expenditure programs, strong cash flows and a healthy balance sheet should regardless support ongoing dividend payments.”

Free cash flow rose to $850 million, enabling Woodside to reduce its net debt to US$2.4 billion from US$2.6 billion.

The recovery in fortunes reflects a global surge in energy prices that has lifted benchmark oil and natural gas indices to multi-year highs. Oil is a reference price for the LNG that makes up the bulk of Woodside’s business.

Dated Brent, the price of oil cargoes bought and sold in the North Sea, reached $100 a barrel on Wednesday for the first time since 2014. Prices are rising as demand outstrips expectations and OPEC producers struggle to hit quotas.

Higher energy prices flowed through to Woodside’s largest full-year dividend since 2015. The company declared a final dividend of US$1.05 per share, bringing the full-year dividend to $US1.35 per share, more than triple the US38¢ paid a year earlier.

Shares popped 4.3% on Thursday after the announcement before easing to end the week 1.7% higher.

Woodside shares remain significantly undervalued despite the share price improvement, closing Friday at $27.44, below Taylor’s $40 fair value.

Taylor puts the market’s muted reaction down to doubts about the longevity of high energy prices and a desire by some fund managers to avoid fossil fuel stocks over environmental concerns.

Sea of green

Source: Woodside full-year report 2021

(Click to enlarge)

Merger with BHP Petroleum on target

Woodside chief executive Meg O’Neill said 2021 was a “transformative” year in which the foundations were laid for the company’s future.

In November the company agreed its merger with BHP’s petroleum business in a deal expected to generate US$400 million in cost savings and create a global top 10 independent energy company. Woodside greenlit its long-awaited $16.5 billion Scarborough mega-gas project the same day.

“The value-creating decisions taken in 2021 are expected to transform Woodside, consolidate our financial strength, diversify our portfolio and enable us to thrive through the energy transition,” said O'Neill in a statement Friday.

“November 2021 could be recorded as the most remarkable month in Woodside’s 67-year history, with the agreement to merge with BHP’s petroleum business and the final investment decisions on the Scarborough and Pluto Train 2 projects."

Shareholders will vote on the merger with BHP in May, with management targeting completion in early June.

BHP’s assets should see group production more than double to around 230 million barrels of oil equivalent (BOE) by 2026, according to Taylor.

He forecasts a 10-year group revenue compound annual growth rate (CAGR) of 7.0% to lift revenue to US$13.7 billion by 2031.

Climate targets on track

Woodside also reported a 10% drop in Scope 1 and 2 emissions and declared it was on target for its 2025 target of 15%.

Scope 1 emissions are those that arise directly from Woodside’s operations, such as from the use of fuel, flaring, or from the production of naturally occurring CO₂. Scope 2 emissions are those associated with the generation of any power that Woodside purchases.

“They are doing a good job and what is practical, in terms of cutting emissions from their products,” says Taylor. “Gas has around half the carbon intensity of coal, and it stands to gain market share in the generation segment and elsewhere if carbon taxes are instituted, as some predict.”

The end-of-year report also detailed Woodside’s Scope 3 emissions plan, including a target to invest US$5 billion in new energy products and lower-carbon services by 2030, including hydrogen energy.