Woodside Energy (ASX:WDS) Share Analysis and Stock Report

2Q23; prices on the nose

Woodside Energy (ASX:WDS) has released its operational activities for the June 2023 quarter to reveal, in our view, a satisfactory result. The surge in production is the final play through of the BHP Petroleum acquisition, with the quarterly numbers to normalise across the comparative periods. We are pleased 2023 guidance remains unchanged. Realised prices were a drag on the result, pushing revenues lower. The following table shows June quarterly production results and revenue: (bbl – barrels, LNG – liquid natural gas, NGL – natural gas liquids):

Source: Woodside (ASX:WDS)

Given the fall in energy prices, we expect Woodside will deliver a negative price variance when reporting its first half 2023 financial results on 22 August. This variance will play a major role in Woodside delivering a lower net profit and cash flow for the half. Operations will have a positive impact but will only be a partial offset to pricing.

Despite the expected softer first half result, we continue to recommend Woodside Energy as a buy for Members with no exposure to the stock. We continue to have a positive long-term view on the demand for LNG going into an energy hungry Asia. We see the need for countries to transition through to green energy sources in the years ahead being a major support for especially natural gas and derivatives.

On the operation side, and on a boe basis, group production rose by 31.7% year-on-year (yoy), to 44.5 million boe. The following chart shows quarterly boe production (Members can see the impact, from 2Q22, of the BHP Petroleum acquisition in the production numbers):

Source: Woodside (ASX:WDS)

We have been monitoring the downward trending production profile and at this stage are of the view, Woodside is settling in the BHP Petroleum production assets. We remain comfortable with the production mix and the heavy tilt to natural gas.

On 2023 guidance, Woodside expects group production will be a record 180 MMboe to 190 MMboe, and well above the 157.7 MMboe production reported for 2022.

On Woodsides’ key product offerings and for LNG, Woodside reported a 1.5% yoy increase, to 20.1 million boe. The following chart shows quarterly LNG production (Members can see the impact, from 2Q22, of the BHP Petroleum acquisition in the production numbers):

Source: Woodside (ASX:WDS)

Pluto (Woodside’s interest 90%) was the key driver in pulling back overall production, with it falling yoy by 28.9%, to 8.8 MMboe, due to planned facilities turnaround. Both Wheatstone (Woodsides’ interest 11.54%) and North West Shelf (NWS, Woodsides’ interest 29.91%) reported higher yoy production for the quarter of 57.3% and 50.1% respectively, to 8.8 MMboe and 2.6 MMboe.

Crude and condensate production rose 50.5% in the June 2023 quarter, with Bass Strait, Wheatstone and NWS driving the result. The following chart shows quarterly crude and condensate production (Members can see the impact, from 2Q22, of the BHP Petroleum acquisition in the production numbers):

Source: Woodside (ASX:WDS)

The inclusion of BHP Petroleums’ producing oil wells swelled the numbers, especially its Gulf of Mexico assets. Bass Strait contributed 904 million boe, Wheatstone 425 million boe and NWS 1,546 million boe for yoy rises of 105%, 53.4% and 40.0% respectively. The Pyrenees and Ngujima-Yin (Woodsides’ interest 60%) on planned maintenance shutdowns.

Woodside’s smaller offerings in pipeline gas and NGL, both were major beneficiaries of the BHP Petroleum acquisition. For the June 2022 quarter, Pipeline gas production surged 106% yoy, to 10.3 million boe and NGL production rose by 10.5% yoy, to 1.9 boe.

Revenue was boosted by the better operational performance but falling energy prices took a toll over the June 2023 quarter. The following chart shows quarterly sales revenue (Members can see the impact, from 2Q22, of the BHP Petroleum acquisition in the revenue numbers)::

Source: Woodside (ASX:WDS)

Revenue eased down 10.3% yoy, to a US$3.1 billion for the June 2022 quarter. Operations, as discussed above were a tailwind, while a lower average realised oil price was a major headwind. Sales of 48.4 million boe were reported, representing a 35.2% increase yoy on higher production and improved third party demand. Woodside reported a 33.7% fall in its average realised energy price yoy, to US$63 a boe, with all its product offerings reporting lower prices for the quarter.

Despite the current weakness in the basket of energy offerings, we hold a modestly positive outlook for energy prices over the remainder of 2023. While the Russia/Ukraine war will continue to assert upward price pressure over what is left of 2023, a slowdown in China and demand destruction in the advent of a global recession will assert to the downside. Supply is however currently constrained by a lack of new investment and OPEC+ production cuts. The war is, unfortunately, likely to linger into 2024 and provide a support catalyst. We expect 2023 will deliver volatility, as a clear trajectory around a US recession remains a little cloudy, as does Chinas growth aspirations. We see supply continuing to remain constrained in 2024.

Woodside’s technical setup is bullish with a rising probability of a topside breakout above $39 in coming months. Woodside has established a series of higher reactionary lows this year, with multiple tests of resistance. This important resistance level looks set to give way on the upside with the most probable catalyst being an inflection and coming upside reversal in crude oil prices.   

Hedging as of 30 June 2023, stands at 10.6 million barrels of production at an average price of US$74.50 per barrel and a further 26 million barrels hedged in 2024 at an average price of US$75.36 a barrel. Woodside has also hedged production out of Corpus Christi to approximately 81% of volumes over the remainder of 2023, approximately 73% of volumes for 2023 and 29% of volumes for 2024. Details of the Corpus Christi hedge have not been provided. We consider these positions as a prudent price risk management tool. Given the current Brent price of US$84.90 a barrel on the average comparison the positions are held at a loss.

Total capital and exploration expenditure for the June 2023 quarter surged 75% yoy, to US$1.3 billion. Exploration expenditure for the quarter rose to US$83.0 million from US$29 million. The big spending tickets during the quarter were Scarborough and Sangomar. We are comfortable with Woodside’s efforts on the capital and exploration front.

Capital spending for 2023 is forecast to be in the range of US$6.0 billion to US$6.5 billion.

Woodside (ASX:WDS) will continue to deliver energy, especially in LNG, into an energy hungry Asia for a long period of time. The comfortably acquisition of BHP Petroleum reinforces our view on the value add in Woodside Energy (ASX:WDS).

Disclosure: Interest associated with FAT Prophets hold shares in Woodside Energy (ASX:WDS).