Reporting Season

Do Woodside and Santos have the energy (and prices) to keep earnings up?

Wed 23 Aug 23, 3:55pm (AEST)
Santos - Primary
Source: Livewire Markets

Key Points

  • Oil and gas prices have fallen in recent months, but both Woodside and Santos reported profits that were broadly in line with expectations
  • Woodside cut its dividend by more than 25%, while Santos maintained its dividend
  • There are risks ahead for the energy sector, including industrial action in Western Australia and delays in the development of the Scarborough gas project

In 2022, high crude oil and natural gas prices gave energy stocks a long-awaited tailwind. For a while, it seemed like nothing was going to stop the oil price from remaining above US$100/barrel for a long time. How times (and fortunes) have changed. Over the last year, the Brent crude price is down 12% and the benchmark natural gas price is actually down over 70%. 

USOIL 2023-08-23 15-48-45
Natural gas (red) and WTI crude (blue) (Source: TradingView)

This week's results from ASX energy heavyweights Woodside Energy (ASX: WDS) and Santos (ASX: STO) appear to reflect this change. Woodside reported a 6% lift in profits but has cut its dividend by more than 25%. Santos, on the other hand, reported a 32% fall in profits although it has maintained full year guidance.

But it's what's ahead that investors want to hear about. And for both companies. there is a lot to contend with. Woodside (alongside joint venture partner Chevron) will have to make peace with LNG port worker unions who are adamant that they want to resolve a long-running pay dispute. If it doesn't happen, a strike could start as soon as September 2nd. Meanwhile, Santos is dealing with a near-$500 million impairment charge due to a write-down of its assets.

So are the best days for the two largest energy companies over - or is this a temporary blip in a much larger super-cycle?

To discuss the Woodside and Santos results, I spoke earlier with Todd Warren, Portfolio Manager of the Tribeca 2050 strategy. Santos was also touted as a stock to watch by Warren on Signal or Noise earlier this year.

Note: This interview took place Wednesday 23 August 2023, following the Santos result. Woodside reported on Tuesday 22 August 2023.

Woodside H1 Key Results

  • Underlying NPAT of $1.9 billion vs $1.8 billion estimate

  • Revenue of $7.4 billion, in line with estimate

  • EBITDA of $4.89 billion, vs $4.99 billion estimate

  • Interim dividend of US80c/share, representing 6.9% dividend yield

  • Secured an average production price of US$75.70/barrel for 2024

Woodside Key Company Data

Screenshot 2023-08-22 at 11.11.59 am
Source: Market Index
Screenshot 2023-08-21 at 5.24.06 pm
Source: Market Index

Santos H1 Key Results

  • Statutory NPAT -32% to US$790 million, underlying profit -37% to US$801 million

  • EBITDAX -23% to US$2.11 billion

  • Interim dividend +14% to US8.7c/share

  • Maintained full year production guidance

Santos Key Company Data

Screenshot 2023-08-22 at 11.13.06 am
Source: Market Index
Screenshot 2023-08-21 at 5.24.23 pm
Source: Market Index
Santos - EDM
Todd Warren, Tribeca Investment Partners

In one sentence, what was the key takeaway from this result?

The results were broadly in line with expectations with very little surprise. When you get these big companies report, if you do get a genuine surprise, they don't tend to be good. 

What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?

Rating: Appropriate

Both companies declared numbers that were broadly in line. The nuances are in the details around projects. They both have a number of projects on the boil and that's really where the market was looking for more information. 

What should investors be aware of from these results?

With regards to Woodside, the additional piece of news that the market was looking for is obviously the news around industrial action in Western Australia, where the detail was light. Where we're not hearing anymore information is with regards to approvals from NOPSEMA with regards to progress at Scarborough.

I hope, at least, that they get all those approvals in time but every day that slides by, the closer we get to the potential for delays with regards to the development at Scarborough. We're still waiting for drilling approvals as well as approvals around the subsea pipeline. 

With regards to Santos, the numbers were broadly in line and there weren't too many surprises there. I guess the one area which was potentially disappointment was around the capital management - specifically no news on a buyback. The dividend was in-line, maybe even a little bit light but debt was also down so that was a decision to preferentially pay down some debt, rather than dividends. 

The market is hoping for more news on a buyback with regards to Santos. But in reality, what must come first is news of closure of the sale of the PNG/LNG stake to Kumul Petroleum Holdings (state-owned oil and gas firm in Papua New Guinea).

At this stage, there's no new news on that front just coming off the conference call. But, management sounds like they are cautiously optimistic that we will get some news by the end of this month with regards to how that progresses. And when that closes, I would expect at that point we should have some more news on buybacks.

Would you buy, hold or sell Woodside and Santos on the back of these results?

Woodside: HOLD

With regards to Woodside, it's more fully valued. I think in relative terms its pricing in a much higher oil price than Santos. I'd say on balance it's a HOLD for Woodside. With the valuation looking more fully priced than Santos, it's harder to get really constructive about the buy case there.

Santos: BUY

We still think there's a lot of value untapped in Santos, particularly around these projects. The hopper is full with regards to news flow on that front, whether it's the PNG LNG selldown, whether it's progress on Barossa and the improvements associated there, whether it's the ongoing development of Pikka in Alaska, or it's the somewhat imminent startup of the Moomba CCS project which continues to develop. We don't think that's reflected in the share price.

What’s your outlook on the energy sector over the year ahead? Are there any risks that investors should be aware of?

Woodside and Santos are obviously transitioning from oil to gas and that is part of the longer energy transition that we're experiencing. In so far as the impact of oil prices go, the reality is that we've got a clear indication from, global buyers, OPEC in particular that they'll protect or defend a price somewhere around US$80/barrel as a minimum and that's not expected to change. 

There is, I think, still perhaps a premature expectation of the death of the energy industry globally. The advantage that obviously the Australian industry has, especially at the big end of town, is that we're exposed to global LNG prices. The events in Ukraine, and of course Europe, have clearly led to a very strong support structure for LNG prices going forward. Albeit in the immediate term, they are somewhat a bet on the European winter and how deep that is.

European gas storage levels are at high levels. But, the reality is if we get a cooler than expected winter than those storage levels will drop very quickly because they're not getting obviously refilled by Russian gas. That leads or plays well into the Woodside base case. 

With regards to the rest of the Australian energy spectrum, the thesis really boils down to East Coast gas and the ongoing challenges that we have in the Australian marketplace, with regards to deliverability of supply into that market and those challenges remain. And frankly, I don't see that any time soon. 

The sad reality is that we put a cap on gas prices in this country. And that doesn't incentivise new supply and that's not as well appreciated by those that make the rules.

How much value are you seeing in the market right now?

That's difficult to say because obviously you get quite significant variation within the sector. You've always got the very big end of town, the BHP (ASX: BHP)'s and the Rio Tinto (ASX: RIO)'s of the world which are very much trading as a function of China and iron ore prices. You've got the names we've talked about today, and then you've got the rest of the sector, which is related to decarbonisation-enabling commodities. 

It's difficult to talk about it in its entirety. We think the sector is massively under-owned at the moment. Whether that's because the market is taking a bearish view on China, and as a consequence is underweight the big end of town, or they're just not understanding the supply challenges that are associated with the battery-related demand that will come from those enabling commodities.

We think there's still a significant opportunity to be had within the sector.

This article was first published on Livewire Markets on Wednesday, 23 August 2023.

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Written By

Hans Lee

Senior Editor

Hans is one of the Senior Editors at Livewire Markets and Market Index. He created Signal or Noise and leads the team's coverage of the global economy and fixed income markets.

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