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Early days for Woodside's $7b new energy spend

Morningstar remains neutral on Woodside’s announcement of its clean energy investment plan.

Mentioned: Woodside Energy Group Ltd (WDS)

Gas producer Woodside wowed on Wednesday with its planned $7 billion spend on new energy projects but Morningstar senior equity analyst Mark Taylor says it's still early days, keeping his fair value on hold.

While Taylor is pleased to see Woodside (ASX:WPL) take steps towards lower carbon initiatives like hydrogen and carbon storage, he says the projects will take significant time to come to fruition.

In the meantime, he believes that gas and LNG will play a key role while the infrastructure for the new energy projects is developed.

"The fair value captures existing and planned projects over their current life expectancy and I'm not projecting the production of oil and gas in perpetuity," he says.

“One thing is certain is that the underlying and existing gas assets will have a value for decades to come simply because you cannot build renewables and its associated infrastructure overnight,” Taylor says.

“It's going to take decades and gas is well placed to be the least offensive existing fuel. It's going to be replacing coal and oil to an extent.”

Chief executive Meg O’Neill revealed on Wednesday Woodside's new plan to build a low cost, lower carbon yet profitable portfolio. The company will focus on two areas: hydrogen to fuel heavy vehicles and ammonia as power generation which follow on from recently announced hydrogen and ammonia projects in Perth and Tasmania, named H2Perth and H2Tas respectively.

Woodside is also planning on developing a solar thermal demonstration plant in California with Heliogen and recently signed a memorandum of understanding with Hyzon Motors for a liquid hydrogen project in Oklahoma.

“In each case, the project location has been chosen for specific reasons, preferably near available renewables or close to market, ensuring they are customer led,” O’Neill said.

O’Neill said the new projects can be upscaled to meet demand as the market develops.

“New energy projects tend to carry a lower risk profile as they are not exposed to upstream or resource risk in the way a traditional oil or gas development is," she said. "There is also a lower financial barrier to entry, given the lower capital required for development.”

As such, Woodside is targeting an internal lower rate of return of around 10% for the new projects and payback within a decade.

The oil and gas producer anticipates by 2030 it will have the potential for approximately 3,000 megawatts of capacity from lower-carbon energy solutions and may include exporting liquid hydrogen from Australia.

The announcement comes as Woodside faces pressure from activists to reduce emissions.

“We expect that in the mid-2020s the new energy transition will be underway, including the start-up of the first of our new energy projects," O’Neill said. "We could potentially be exporting ammonia from Australia and developing carbon capture and utilisation opportunities. We will continue to scale-up our carbon offset projects to ensure we deliver on our emissions reduction targets."

Key role for LNG

The return on the new energy projects is marginally lower than future oil developments as Woodside is targeting a 15% internal rate of return and payback within five years.

“Oil investments can be attractive due to the shorter development cycle and higher cash generation. Subsea tiebacks to existing oil infrastructure can be particularly attractive,” O’Neill said.

Meanwhile gas projects including the Scarborough gas field and the upgrade of the Pluto processing facilities are targeting 12% and payback within seven years.

“We expect LNG to remain an important part of the energy mix in our region for decades to come, both as a lower-carbon source of fuel for coal-dependent countries and as convenient firming capacity for renewables,” O’Neill said.

“But our significant investment target in new energy is aimed at positioning Woodside as an early mover in this evolving market and supporting the decarbonisation goals of our customers.”

Taylor agrees and is optimistic that Woodside is taking a “realistic stance” in line with the way the world is shifting towards lower carbon and believes companies need to get in early to start looking at where they can position themselves.

The emissions from projects in all capital allocation categories will be managed Woodside’s net emissions reduction target of 30% by 2030 and net zero aspiration by 2050.

Benefits of scale

The new energy plans are contingent on Woodside’s US$28 billion merger with BHP’s petroleum division. Once merged, the entity will become Australia’s largest listed energy company.

The deal is estimated to double Woodside’s production and already has a raft of projects in the pipeline including Scarborough, Sangomar in Senegal, Mad Dog Phase 2 in Shenzi North and other opportunities in the Gulf of Mexico.

The merged business is expected to reach $US400 million in cost savings along with high margin cash flows and a stronger growth profile.

Woodside will hold a 52% stake in the merged company and will fund it by issuing new shares that will be distributed to BHP shareholders.

The merger is due to be completed in the second quarter of 2022.

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