Having assessed Woodside Petroleum’s (ASX: WPL) ability to capitalise on stronger demand for oil and then factored in growing LNG supplies - following the dream $40bn merger with BHP’s (ASX: BHP) petroleum business - Bernstein Research expects the merged entity to be the leading performing oil and gas company in the Asia-Pacific market in 2022.
The Wall Street-based researcher’s prophecy must be music to the ears of Woodside management who expect the merger with BHP to provide the missing critical mass needed to put the company on the radar of institutional investors globally.
Despite the negative sentiment dished out to oil and gas corporates, Bernstein still sees intrinsic value in the sector and remains positive on the industry outlook.
Bernstein also urged investors not to overstate the impact of decarbonisation on oil, which the forecaster notes will still be needed for industries that cannot move away from fossil fuels.
As a result, Bernstein expects global demand for oil to be as much as 50m barrels a day in 2050.
Bernstein’s chief oil and gas analyst in Asia, Neil Beveridge, noted that while the energy transition will be problematic, global LNG demand is unlikely to peak until 2040.
The tipping point in Bernstein’s robust outlook for Woodside appears to be Woodside’s decision to acquire BHP’s petroleum assets in return for a 48% stake in the combined company.
The Wall Street forecaster also realises that from a macro perspective – including oil prices nudging US$80 a barrel, recovering oil demand – plus a fall in capex, Woodside couldn’t have timed its merger with BHP any better.
Bernstein expects oil demand to grow by 3.5m barrels a day this year compared with 2021 and expects prices to be at the lower end of a range of $US70-$US90 a barrel in 2022.
What’s also attractive about the Woodside/BHP deal are the valuation assumptions. For example, the original agreement pegs the price tag Woodside is paying for BHP Petroleum at around US$13.5bn, significantly cheaper than some fair value for the division that range between US$15-$20bn.
Assuming the merger is approved when put to shareholders in the June quarter, the combined entity will produce about 200 million barrels of oil equivalent and reserves of more than 2 billion barrels - more than double Woodside’s current output - and significantly more cash flow.
The combined entity will effectively add billions to Woodside’s earnings without the company having to inherit more debt. But that said, it should be remembered that to pay for it all, the company will be issuing a large pool of equity.
While the market awaits further insights into how Woodside will fund the acquisition, the company has already flagged that there’s around $400m in annual savings from combining projects.
Meantime, Woodside has also secured clearance from its partner for its $16.5bn Scarborough LNG venture off the coast of WA.
While the resource contains 11tn cubic feet of gas (Tcf) – three times as much as the fields that feed the original Pluto project – environmental objections place an unresolved overhang over the project.
While Scarborough is expected to face substantial competition from the US and Qatar when it comes online in 2026, Bernstein expects Woodside’s supply costs to be lower than the US, giving the firm a competitive advantage.
Consensus on Woodside is Moderate Buy.
Based on the data from the seven brokers that cover Woodside, reported on by FN Arena, the stock is currently trading at a 17.2% discount to the consensus target price of $26.63.
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