Key Morningstar Metrics for Woodside Energy Group Limited (ASX:WDS)

Data from Morningstar Direct as of 28 February 2024

What we think of Woodside’s Shares

As Australia's premier dedicated oil and gas player, Woodside Petroleum possesses operations encompassing liquefied natural gas, natural gas, condensate, and crude oil. LNG is the mainstay, with more than 20 years' successful delivery of cargoes to East Asian customers. Woodside has operatorship and a one-sixth share in the North West Shelf Joint Venture, or NWS/JV, on the north-west coast of Western Australia. Under its watch, the number of LNG trains has grown from one to five, taking gross output to 16.4 million metric tons per year. This pedigree is unmatched in the Australian oil and gas space, and there's more potential development in the pipeline if prices will allow. Missteps, including commissioning delays and cost blowouts during the China-driven resources boom, are now past. Woodside has demonstrated commendable conservatism in capital allocation over several years. 

Woodside Share Price (ASX: WDS)

Source: Morningstar Direct. Data as of 28 February 2024

Woodside Economic Moat Rating

We don't expect Woodside to generate midcycle returns on invested capital materially above its cost of capital. Woodside's ROIC exceeded 15% between 2003 and 2008, until heavy Pluto LNG capital expenditure drove single-digit returns until 2010. The start of production at Pluto saw reversion to excess returns, peaking at 20% in 2014. But with the oil price rout, and a midcycle Brent price of $60 per barrel of oil from 2020, we anticipate high-single-digit ROICs below the weighted average cost of capital, including capital spend on Pluto Train 2. Start of expanded production could see improvement from 2027, but not sufficiently above the company's cost of capital. Approval of Pluto Train 2 is increasingly certain, given that Woodside now has the gas at Scarborough. Signs point to large increases in Chinese LNG demand going forward, with growth driven by clean air policies and urbanization, while European growth is driven by rising carbon prices and declining domestic supply. Woodside notes 230 Mtpa of additional LNG supply will be required by 2030, in broad step with our own views.

Pluto was built with expansion in mind, and future growth will be considerably more capital-efficient than the current stand-alone single LNG train. But Pluto's first train was built during the peak of Western Australia's mining investment boom and Woodside bloated its invested capital base, leading into oil price capitulation. Cost savings can come on the capital side from better utilization of Pluto tankage, wharfage, and surrounding infrastructure via a second LNG train, but there is no certainty that a second train will be approved while LNG markets are in excess supply. In addition, competing new entrants can benefit from declining industry capital costs, while Woodside has fixed a large proportion of its capital during a peak.

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Woodside Risk and Uncertainty

Our Morningstar Uncertainty Rating for Woodside is Medium. Commodity price volatility is a key risk in Woodside with a high proportion of fair value deriving from projects that are yet to be built. To put this in perspective, all Australian resource and energy exposures have this risk. Relative to Australian peers, Woodside is a comparatively lower-risk Australian upstream energy exposure because of its low operating costs and moderate gearing within what is an above-average-risk industry.

Woodside faces environmental and operational risks, a given with the oil and gas industry, as well as community-specific risks associated with some of its assets. It is also a comparatively small player in a world of oil and gas super majors.

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