Woodside/WDS

Headlines

Woodside was a good result, at consensus, although most of the good news was the very recent pre-result developments (legal and regulatory hurdles declining, evidenced by Santos/Barossa approvals, equity sell down of Scarborough).

The US refilling the Strategic Petroleum Reserve is also a solid underlying thematic, as is the seeming recovery in global macro (PMI’s rebounding, industrial production data improving, consumer confidence rising) and what does seem to be a “reacceleration” in the US economy.

Whilst China does appear to be in a deep economic funk, the “reopening” aspect remains intact, and stimulus that raises household income and wages should be, we think, a much more sustainable form of growth than ever-expanding property and investment (which doesn’t do all that much for oil demand).

We are much more constructive on oil and gas than coal, within energy, and can see the prospect for a longer sunset, for hydrocarbons (as renewables rise) than we did previously. Rising global populations, with energy needs, against a backdrop of reasonably rational supply (projects have difficulty getting funded, and management teams that are trying to prioritise cashflows and returns over production for production’s sake).

Lastly, there does seem to be quite a bit of global M&A activity in the O&G space. It’s unclear whether any of that would land on the last remaining players of size in Australia (Woodside, Santos) but it does suggest further industry rationalisation, which is broadly supportive overall.

Given that Australian O&G companies have under-indexed global players, this would be a pleasing developement.

Details

Woodside has near-term production upside (Scarborough, next year, Sangomar, a few months from now, 93% complete), strong cashflows, and a robust balance sheet.

Environmental and legal issues had been something of an overhang (as it had for Santos, where construction activity was halted until the legal challenges had been resolved or dismissed).

The sell-down in Scarbororough, (announced on the 23rd) was also very good news.

The US has proposed an approvals freeze on further LNG export terminals, and Japan is seemingly concerned about what market impact that might have, years down the track.

We are reasonably optimistic about a “soft landing” for the US, and more concerned about a “hard landing” domestically. Whilst energy is very cyclical, it isn’t at all impacted by what happens locally, and is thus a reasonable diversifier in our view. We also think that the oil price is not especially high, in real terms, given inflation, relative to history.

Geopolitical instability, in the middle east, is rising, and a near benchmark weight exposure to energy neutralises that risk of a broader spill over (Iranian sanctions, damage to oil producing assets in the region) to a large degree.

The graph above doesn’t look dramatic, but the below certainly does. However, the key to commodities is not to buy them when they are hot, but to buy them when they are not.

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