Woodside Energy Group Ltd

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

A global energy company, Woodside is focused on producing LNG, oil, and gas with a strategy to drive value through the energy transition by building a low cost, lower carbon, profitable, resilient and diversified portfolio.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Woodside Energy Group Ltd (WDS) is an Australian global energy company focused on the production of liquefied natural gas (LNG), oil, and gas.

The company’s strategy centers around navigating the energy transition by developing a low-cost, lower-carbon, resilient and diversified portfolio.

Revenue Distribution

Woodside’s revenue is derived from several segments and regions:

  • Australia: forms a substantial portion of Woodside’s production base including LNG facilities, oil and gas projects and exploration areas.
  • International Operations: includes producing assets in the Gulf of Mexico and the Caribbean with notable exploration opportunities.
  • Marketing and Trading: is involved in the global supply chain, engaging in the marketing and trading activities for LNG, crude oil and natural gas.
  • Global Energy Transition: There’s a strong push towards lower-carbon energy sources. This impacts the overall demand for traditional oil and gas but also creates opportunities in renewable energy and new solutions.
  • Geopolitical Volatility: The energy sector is highly susceptible to geopolitical events, impacting prices, demand, and supply. The Russia-Ukraine conflict has disrupted global gas supply chains, leading to heightened demand and prices for gas from other nations such as Australia.
  • Pricing Trends: Oil and gas prices have shown some volatility, however, both the oil and gas prices are now quite high, after recovering from low during covid, this drives profits.
  • Shift to LNG: There is an ongoing transition to liquified natural gas (LNG), as it is less polluting compared to oil and coal and also easy to ship over distances.

Competitive Landscape

  • Intense Global Competition: The energy market is competitive, with major players, state-owned companies, and smaller players all vying for market share. Competition exists across all three main sectors that Woodside operates in.
  • Rivalry: There is intense rivalry from existing firms especially in commodity based businesses where there is little product differentiation.
  • Risk of New Entrants: With the move towards renewable and more sustainable options, new companies and competitors are arising in the market, which adds more competition.
  • Bargaining Power of Suppliers/Buyers: Due to the volatility of prices, buyers and suppliers both have bargaining power in the industry as prices can fluctuate significantly.
  • Threat of Substitutes: Many renewable energy options such as solar or wind offer substitution to oil and gas, limiting price power.
  • Economic Moats: This is important because the companies with moats have greater resilience, which is needed in highly competitive, cyclical industries such as energy.

What Makes Woodside Different

  • Diversified Portfolio: Unlike smaller players, Woodside has both Australian and international assets.
  • Emphasis on LNG: Woodside is strongly focused on LNG production and trading.
  • Focus on Operational Excellence: Woodside aims to be a low-cost producer.
  • Transition Focus: Woodside aims to leverage its experience in traditional oil and gas to develop and expand into the new energy market.

Financial Analysis

Earnings Overview

In 2022, Woodside had record production, resulting in a net profit after tax of $6.498 million and an underlying net profit after tax of $5.200 million

  • Strong Operating Results: Woodside has shown record profits, driven by higher commodity prices, and the company’s operating margins have also been high.
  • Revenue Growth: 2022 revenue was $16.8 billion compared to $6.9 billion in 2021. This has been driven mainly due to higher prices for oil, LNG, and natural gas.
  • Free cash flow: free cash flow for 2022 was $6.5 million.
  • Return on Equity and Invested Capital: Return on equity was 17.9% and return on average capital employed was 25% (but both these metrics are significantly adjusted for intangible assets which affects comparability with peers).
  • High returns: The metrics show a company that can generate profits beyond its WACC, but both numbers do not include all intangibles.
  • Tax and Finance: Woodside has a low cost of debt and tax benefits from operations.

Balance Sheet Health: 3/5

  • Debt: Woodside has large amounts of debt as a percentage of total capital as is common in the energy industry. This can be an issue if revenues drop significantly.
  • Cash: The company does have a solid cash balance of 5.1 billion as of FY2022.
  • Debt-to-Equity ratio: The debt-to-equity ratio sits at 1.07, which, by most metrics, is high. However, for an energy company, this is typical.
  • Net Tangible Assets: As an energy company, many of Woodsides assets are capital intensive.

Moat Assessment: 2/5

While Woodside has some aspects of a moat, it is not strong and is vulnerable. Here are the factors that lead to rating 2/5.

  • Intangible Assets: Woodside has established a strong reputation for the quality of its operations and reliability of its supply. It does also have large long-term contracts that add some stability to earnings and act as barriers to entry for others.
  • Cost Advantage: Woodside is focused on low-cost production and has access to cheap assets, such as gas fields, that are difficult to get for competitors.
  • Switching Costs There are some moderate switching costs, particularly for long-term partners who may not want to change suppliers due to the cost and time.
  • Size/Network Effect: The sheer size of Woodside’s operations makes it harder for competitors to gain the scale needed to offer comparable pricing, as a high cost of entry in the business and it enjoys the benefits of having a global supply and distribution network. However, the network effects are weak as their is no strong “demand side” economies.

However, these advantages are weak. Oil and Gas are largely commoditized, meaning that they compete mainly on price. It is relatively easy for competitors to replicate what Woodside is doing as technology advances, and there are fewer barriers to entry for smaller players due to lower costs of production and easier infrastructure setup. Ultimately, it struggles to set itself apart from the competition in a meaningful way.

  • Moat Rating: 2/5 - The presence of a few moats, mostly surrounding scale/production capacity and long term partnerships gives some form of defensibility, but this is still weak and vulnerable.

Risks to Moat and Business Resilience

  • Commodity Price Volatility: A major risk is the volatility of oil and gas prices. Lower prices could severely impact Woodside’s revenue and profitability. This is something they don’t really control and is dependent on global demand.
  • Political and Regulatory Risks: Changes in government policy regarding carbon emissions, exports, and taxes can significantly affect Woodside’s business.
  • Environmental Concerns: A greater focus on climate change could lead to limitations on oil and gas exploration/production, also, legal challenges from environmental organizations can pose risks to business operations.
  • Technological Disruption: A fast pace of technological change could introduce substitutes and new production methods that put Woodside’s business model in risk. The move towards renewables poses a large threat.
  • Economic Conditions: Woodside’s revenues are tied to economic growth and contractions. A weaker global economy will reduce prices as well as demand.
  • Geopolitical Risks: The company’s operations are susceptible to political instability and geopolitical risk as many major markets are also in politically unstable regions.
  • Major Disasters: Production and distribution are susceptible to man-made or natural disasters, causing disruptions in operations as well as environmental harm.
  • Reliance on Key Assets: The value is highly concentrated to a few assets, in case those assets underperform for any reason, the business would be greatly impacted.

Management has stressed the importance of keeping costs under control to ensure that the company is resilient through different market cycles. The company is undertaking a multi-pronged approach to energy transition, including carbon capture, hydrogen, and new energy solutions, to become more resilient.

Understandability: 4 / 5

Woodside’s business model is relatively straightforward. It operates in the energy sector, which is readily understood by most, extracting, processing, and selling LNG, oil, and gas to global customers. The financials are reasonably transparent and accessible, but the sheer complexity of the industry and the operations at a global scale mean that this is not an easy one to grasp. There are lots of footnotes and things to check.

Recent Concerns / Controversies

  • BHP Merger: Woodside recently acquired BHP petroleum. It is important to monitor the full impact of the integration of this acquisition. In the latest earnings calls it has been noted that the merger integration is proceeding ahead of schedule, and they expect the acquisition to bring significant value.
  • Global Energy Markets: The company’s performance is strongly influenced by global energy markets which have shown volatility due to the Russia-Ukraine war.
  • Climate Change Targets They are also focusing on lowering their carbon footprint by reducing emissions. Management has stated that it does not see the energy transition as a threat but rather an opportunity. There is no evidence that management is doing any actual work in lowering carbon output, all claims are largely just buzzwords.
  • Australian and Global Regulations: Woodside needs to carefully comply with all regulations on oil and gas production and taxation in every region where it operates, which has proven hard at points.
  • Cost Inflation Woodside has experienced higher costs and a lack of labor in many regions and is trying to mitigate this.

Conclusion

Woodside is operating in a complicated industry with unique challenges, but has a sound business model and strong financials. They do have some weak moats and the risks involved in oil and gas businesses are real. Overall, it is a decent business but definitely has its own problems.