The Woodside quarterly was mixed, and hence the weaker share price reaction on the day.
Sales volumes were modest, however the strong pricing environment saw sales revenue increase materially. That’s the generally good news.
It is possible that marginal investors forget the pricing lag effect (e.g, lagged Japan Customs-cleared Crude (JCC) is a typical reference price for long-term LNG contracts) which can lead to some surprise when revenue growth isn’t quite as strong as expected.
However the main disappointment was the sizeable proven and probable reserve downgrade to Wheatstone.
Revenues come from production volume * price, and less reserves mean shorter lives and ultimately less cumulative production, which means less cumulative revenues and profits, which means a lower DCF valuation.
It’s not a big impact, a handful of percentage points to a SOTP (sum of the parts) type valuation, but on a down day for oil, and after a strong run in the share price, the market reaction was one of disappointment.
Woodies is still very cheap. It is priced as ex growth, despite having good near term growth optionality via Sangomar. It has good tailwinds from the BHP merger (highly cash generative assets coming into the mix), and should continue to enjoy a strong pricing environment, and high levels of demand for its products. That will aid in the sell-down/monetisation of equity within Scarborough and Pluto, which we regard as another positive near term catalyst.
So, overall, happy with Woodies, as it remains one of our larger active weights. From the portfolio perspective, we are playing the oil and gas/energy thematic through WPL, ORG, AZJ, MND and WOR.
This diversified approach is working, with ORG meaningfully re-rating, AZJ providing a strong and attractive yield, and Mono’s and WOR also re-rating on the back of higher required capex plans from the majors.
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