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Revenue surges at Woodside thanks to higher energy prices

Lewis Jackson  |  26 Oct 2021Text size  Decrease  Increase  |  
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Revenues at Australia's largest independent oil and gas company have surged as soaring global energy prices boost the price of natural gas.

Woodside Petroleum (ASX: WPL) reported a double-digit jump in third-quarter revenue last Thursday, up 19% to US$1.53 billion. This follows a rise in prices for its natural gas cargoes, up 40% versus last quarter.

Morningstar senior equity analyst Mark Taylor expects these conditions will persist until at least the end of the year.

“In the fourth quarter, Woodside can expect to see even greater benefit from stronger pricing given the one-quarter oil price lag in its LNG contracts, and the even greater spike in spot LNG prices post the third quarter,” he says.

Taylor maintained his $40 fair value following the announcement. The stock closed Tuesday at $24.07, a 40% discount to fair value.

"Woodside shares have done little more than drift over the past year, very strange given Brent crude has more than doubled over that period and spot LNG prices are up more than five-fold," he says.

"We think an $24 share price dramatically understates Woodside's worth in the energy transition."

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The transition away from fossil fuels faltered in recent months as buyers in Asia and Europe fought over supplies of natural gas and other fuels ahead of winter.

Moves to limit coal use in China, a dip in renewable energy output in Europe and limited natural gas supplies sent European and Asian natural gas spot prices soaring. European spot prices are up 144% since July while prices in Asia jumped 62% in the first week of October alone.

Woodside is diverting more production to spot markets to capture those higher prices. In Q3 it sold six cargoes on spot markets—about 10% to 15% of production—but expects to reach 17% this quarter. The remainder of its production is sold on long-term contracts.

“No one expects spot prices to remain at these elevated levels for long, but it's nice to make hay while the sun shines,” says Taylor.

Higher prices have helped Woodside stage a recovery in markets. At the end of August, the stock was down 15% for the year. Today, shares are up 4.4% thanks to a 22.5% jump in September.

Taylor says the upcoming approval of the company’s proposed Scarborough and Pluto Train 2 developments could be another positive catalyst for the share price.

The roughly $11 billion project would massively expand Woodside’s LNG resources. All major contracts and environmental approvals are now in place and a final decision is expected later this year.

Elsewhere in the results, the company also announced a 2% drop in production following maintenance at its facilities in Western Australia.

Merger with BHP on track as Woodside moves into hydrogen

The result caps a busy quarter for Woodside. The company has made big moves to solidify its position as Australia’s largest natural gas player while also expanding into new areas.

In August, Woodside announced a merger with BHP’s petroleum business. The combined business would be one of the top ten largest independent energy companies in the world.

Shares will begin to change hands from next month. The deal is expected to close in the second quarter of 2022. Woodside shareholders will own 52% of the combined entity.

Taylor likes the deal but is waiting for more information before determining its impact to fair value.

On Monday, Woodside joined the global race to scale up hydrogen, a zero-emissions energy source some hope will replace fossil fuels in industries such as steelmaking.

The company announced plans for a $1 billion hydrogen production facility south of Perth. At full capacity, the facility would produce 1500 tonnes of hydrogen for export.

Construction is expected to start in 2024.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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