Woodside 2Q24 & 1H24 Results | Climate Transition Analysis
This report comprises general statements of factual information and not financial advice. Read our Important Notice.
UPDATE: Woodside 1H24 results - 27 August 2024
In its 1H24 results, Woodside acknowledged that it is reflecting on the 58% vote against its updated transition plan at the April AGM, and is engaging with investors to gather feedback.
In our latest report, 2Q 2024 Results | Climate Transition Insights, we highlighted critical questions for investors to consider when engaging with Woodside during this feedback process ahead of 2025.
Key takeaways:
01
1H24 earnings decline, gearing rises with M&A activity.
Woodside reported 1H24 underlying NPAT of $1.6bn, down 14% from 1H24 primarily due to lower commodity prices. M&A activity surged in 1H24, lifting free cash flow to $740m (up from $314m in 1H23) mainly via Scarborough sell-downs. Net debt rose 67% year-on-year to $5.4bn due to planned capex. Gearing at 13.3% remains within the 10-20% target but is expected to temporarily exceed this range during the investment cycle following the Tellurian and OCI Clean Ammonia acquisitions.
02
Woodside makes largest New Energy investment to date.
1H24 saw Woodside’s biggest development in New Energy to date, with the announcement of the acquisition of OCI Global's ammonia project in Texas for $2.35bn,10x the amount spent in FY23. This is the first significant move toward its $5bn capex goal for New Energy by FY30.
03
Ammonia acquisition raises questions on Woodside’s ambition.
The OCI Clean Ammonia acquisition raises concerns about Woodside's low-carbon ambition. This transaction represents half of Woodside's low-carbon capex for just phase 1 (1.1 Mtpa). Phase 2 (another 1.1 Mtpa) will require an additional $1.2-1.4bn, totaling nearly 75% of Woodside’s New Energy capex target. At peak, it will produce 2.2 Mtpa of ammonia (~6-7 Mboe), only 3-4% of FY23 production. Emissions impact remains unclear; phase 1 (1.1 Mtpa) by FY25 relies on unabated natural gas, offering no emissions cuts. ‘Lower carbon’ ammonia by FY26 hinges on the success of ExxonMobil's CCS facility to support Linde, Woodside’s primary feedstock supplier.
Woodside 2Q24 results - 23 July 2024
Woodside’s recent acquisition has put New Energy on the sidelines, with Tellurian set to sustain current sales level into the 2030s. We hope to get more details in Woodside’s half-yearly update in August.
Our view
As Woodside takes steps to grow its fossil fuel portfolio, few remain convinced that the company has the capability to transition. The company has no low carbon offerings in its portfolio, and the proposed 5Mtpa of emissions avoided or abated implies minimal ambition for New Energy.
To deliver on decarbonisation, Woodside's transition strategy must move away from the sidelines, where targets are aspirational and highly contingent. Investors should engage on these material gaps:
1) Reliance on offsets. We estimate offsets will account for ~70% of total emissions reductions between Woodside’s FY16-20 baseline and FY30 .
2) Rising scope 3 emissions. Woodside’s transition strategy does not address its growing customer scope 3 emissions, with sanctioned production estimated to grow 16% to FY27, and LNG expansion sustaining sales thereafter.
3) Unclear value for decarbonisation. Unlike its Australian peer Santos, Woodside does not provide quarterly disclosures for New Energy, making it difficult to track progress against its ambition. FY23 investment must grow 26% on average to meet its $5bn aim, and the proposed 5Mtpa of emissions avoided or abated translates into an expensive and small opportunity.
4) Emissions targets are not comprehensive, addressing just 8% of emissions.
Key takeaways
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Q2 results were consistent with performance in 2Q23. Production and sales were maintained at 44 M boe and 48 M boe, respectively. Group capex was down -7% on 2Q23, with this reduction driven by reduced capex on its Scarbourough project which is now 67% complete. A major Q2 announcement was the acquisition of US LNG developer Tellurian for $1.2bn, including debt. This acquisition will support the build-out of Woodside’s portfolio overseas, which up until now has been in crude and pipeline gas via its 2022 acquisition of BHP Petroleum ($20bn).
On hydrogen, Woodside reiterated that its hydrogen refueller @H2Perth is expected to supply hydrogen to industrial customers in WA in 2025. With an expected production of 1 tonne H2 p.a., this is less than 0.1% of its FY30 current pipeline. On its larger H2OK project in the US (60tpd), the company is still awaiting final guidance for the 45V Clean Hydrogen Production Tax Credit.
The company also announced an agreement to generate 1.6 Mt of carbon credits over 40 years via reforestation projects in Paraguay.
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Woodside's recent deal centres around the Driftwood LNG export project on the U.S. Gulf Coast, with a phased development plan: Phase 1 (11 Mtpa), Phase 2 (increasing to 16.5 Mtpa), and Phases 3 & 4 (up to 27.6 Mtpa). Woodside aims for FID readiness for Phase 1 by 1Q25 and plans to sell-down 50% of the project to partners. Woodside will rely on third-party feed-gas instead of developing its own upstream resources.
The project's development costs are projected to total $26bn (excluding pipeline costs), with ~$13bn attributable to Woodside after sell-downs. This far exceeds Woodside’s $5bn New Energy investment target.
Woodside’s sanctioned projects are projected to decline significantly later this decade, creating an 80-100 Mboe gap. The Tellurian acquisition indicates that 'New Energy' will not bridge this gap. Phases 1 and 2 will produce nearly 70 Mboe of equity LNG, with Phases 3 and 4 increasing this to over 110 Mboe.
At peak capacity, Driftwood would propel Woodside’s LNG production volumes to ~25 Mtpa (after divestments). This puts Woodside on par with TotalEnergies’ FY30 production target of ~24 Mtpa, but behind Shell (~37 Mtpa).
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The Tellurian announcement makes it clear that Woodside plans to continue selling fossil fuels into the 2030s, rather than materially pursuing low-carbon alternatives.
The company has confirmed there will be no change to its emission target or ambitions. Offsets have been flagged as one lever to manage the emission impact of the project. In our prior note, we estimated that under Woodside’s existing portfolio, offsets will account for ~70% of total emissions reductions between Woodside’s FY16-20 baseline and FY30. For abatement opportunities to be prioritised over offsets, it is unclear if Tellurian will need to compete with the company’s internal carbon price of ~$80/tonne used for Australian assets or their growing portfolio of offsets (<$20/tonne).
In addition, it should be noted that designing/operating out features for LNG production can only do so much to minimise scope 1 and 2 emissions, putting net-zero aspirations at risk. For investors interested in a scope 3 target, locking in LNG production will remove the possibility of any significant reductions that can be achieved to 2030 and thereafter.
In the absence of a scope 3 target, low-carbon volume targets and plans to slow down fossil fuel production to 2030, we see no clear pathway for the decarbonisation of Woodside’s portfolio to FY30. With $5 bn earmarked for new energy projects (hydrogen, CCS) expected to translate to a mere ~5 Mtpa of avoided emissions (~6% of Woodside Scope 3), it will do little to de-risk the company’s exposure to oil and gas.
