Woodside FY24 profit down 14 percent to US$1.63 billion, impacted by lower average realised prices.

About Woodside Energy Group Limited

Woodside Energy Group Limited (Woodside, the Group, ASX: WDS) pioneered the development of the LNG industry in Australia and today it is playing a key role in the clean energy transition.  Established in 1954, and originally known as Woodside (Lakes Entrance) Oil Co NL, it took its name from the town of Woodside in Victoria, which is close to its oil leases. Today the Group employs 5,000 people and is Australia’s largest independent dedicated oil and gas company.

June half-year financial and operational highlights

Woodside has reported a first-half year Underlying Net Profit After Tax of US$1.63 billion (A$2.40 billion), down 14 percent on the corresponding 2023 half-year. Operating revenue was down by 19 percent to US$5.99 billion, and mainly impacted by 15 percent lower average realised prices. The average realised sale price per barrel of oil equivalent (boe) was US$62.60, down from US$74 boe in FY23. Production volume for the half-year was 89.3 million boe, a decline of 2 percent while unit production cost was well managed in that it was reduced by 6 percent to US$8.30 boe, despite an unfavourable inflation environment.

The measurement term million barrel of oil equivalent is a unit of energy based on the approximate energy released by burning one barrel of crude oil.

Net cash flow from operating activities was US$2.39 billion, and after providing for capital and exploration expenditure and proceeds from fixed asset disposals, free cash flow was US$0.74 billion.

An interim dividend of US$0.69 per share was declared, maintaining Woodside’s 80 percent payout ratio.  This relatively high payout ratio is supported by a conservative gearing ratio of 13.3 percent, which is within the gearing target range of 10-20 percent. Woodside considers that this gearing target range is 10-20 percent through the investment cycle which means during times of significant growth capital expenditure, the top end of the range may be temporarily exceeded. The less desirable alternative is to issue dilutionary equity which typically results in a drag on earnings per share.

Scarborough Energy Project

This project is located 375 kilometres off the coast of Western Australia and is now 67 percent complete. First LNG cargo is scheduled for 2026, and Scarborough will also deliver domestic gas into the Western Australian market. This is a significant project for Woodside that has accounted for about 90 percent of capital expenditure in the June half-year and when fully operational by 2030 will account for around 60 percent of Woodside’s annual production volume.

The Scarborough project is strategically important because the North West Shelf project is a gas field in natural production decline after 40 years of operation.  Woodside’s share of North West Shelf production in the June half-year was 19.6 million boe, equivalent to 22 percent of Group production volume.

Full-year 2024 Outlook Guidance

The long-term prospects of Woodside are dependent on two key variables; production volume and energy prices, particularly as measured by the price of a barrel of oil.

Woodside’s full-year 2024 production guidance is 185-195 million barrels of oil equivalent, which is broadly in line with FY23 production volume of 187.2 million boe. The commissioning and ramp up of the Scarborough project should see this current volume of production increase from 2026.

Energy prices over the long-term are likely to increase, based on independent forecasts which are for LNG demand to grow by at least 50 percent in the next 10 years. Much of this demand is expected to come from coal-to-gas switching to produce electricity, especially in the Asia Pacific region, which presently accounts for 80 percent of global coal use.

When used to generate electricity, gas produces half the lifecycle emissions of coal, and gas can also augment energy needed for electricity grids powered by renewables and batteries.

According to the International Energy Agency, coal-to-gas switching was the largest driver of energy-related emissions reductions in the US power sector in 2023. Currently global coal consumption is eight times higher than global Liquid Natural Gas meaning there is a sustained opportunity for coal-to-gas switching. This is especially the case in China where natural gas use is expected to grow to 605 billion cubic metres in 2040, up from 390 billion cubic metres today as part of the country’s decarbonisation efforts.

It is interesting that Woodside discloses that its financial targets included in its June 2024 presentation material assume a long-term Brent Oil price of US$70 per barrel. This compares to recent Brent Oil Futures above US$77 per barrel. This oil price assumption may prove conservative. Woodside hedges about 30 million barrels of oil equivalent or less than 20 percent of annual production which means that 80 percent of production volume should capture any oil price upside. Supply disruptions arising from conflict in the Middle East and increased demand for energy from a stronger world economy should put a floor under the price of oil.

Woodside’s high-quality, cash-generative portfolio feeding into growing LNG demand arising out of the need for energy security and decarbonisation should support stable earnings over the medium term.