Investment research firm Bernstein has named Australian liquefied natural gas (LNG) developer Woodside (ASX:WPL) as its “best idea” for the fourth quarter 2021 as prices surge and the Asian market tightens. Significantly, Woodside is one of the most exposed LNG suppliers to the spot market.
Woodside’s share price, which has lagged peers, will be a prime beneficiary of higher spot LNG prices and a tighter market over the next two to three years, Bernstein said in a note today.
Strong demand growth and reduced inventories have pushed LNG spot JKM prices to over US$35 per million British thermal units (mmBtu) to which Woodside has exposure to through a spot portfolio, which makes up more than 20% of the company’s sales.
Moreover, there is limited incremental supply of LNG over the next few years. Coupled with higher oil prices this should lead to double digit LNG prices through to 2024. With LNG accounting for more than 50% of revenue, Bernstein believes Woodside is one of the most direct ways to play this.
The Woodside and BHP merger, which has spooked investors and saw Woodside’s share price fall, will help advance investments in LNG growth. Scarborough is a competitive LNG project, which can be funded off the balance sheet, said Bernstein. Supply costs of US$6.80/mmbtu (DES), is lower than US LNG. Woodside plans to sell down 49% of Pluto T2 before taking a final investment decision this year, which could save US$3 billion in capex and raise US$700 million, added the research firm. A sell down of the Scarborough field and FID are key near-term catalysts.
Woodside’s share price was trading around A$25 at 7.30am Singapore time today, up from recent lows of A$19 in early September following the announcement of the merger. Bernstein has a target price of A$30 based on a $60 oil price.
“Woodside can fully fund its growth expansion and sustain attractive dividend. With FCF expected to grow from $2.0bn in 2022 to $5.5bn by 2027, Woodside will trade at a FCF yield of 16%. Post-merger, Woodside’s net gearing falls to 12% with net cash post 2023,” said Bernstein.
“There are many ways to play rising gas prices and many gas related stocks have done extremely well, but Woodside has surprisingly lagged, perhaps complicated by the BHP merger. We are positive on the outlook for Woodside given: a) higher winter gas prices and a tight LNG market over the next two-three years which will help spot LNG prices to which the company is highly levered to; b) significantly better funding position and ownership alignment post-merger to take FID on Scarborough before year end; and c) trough valuations in an inflationary environment to capture pricing upside,” said Bernstein.
“Looking at the historical stock prices versus the long-term oil price (60-month contract), Woodside is trading at a wide discount to its 5-year historical trends and our DCF valuations. This presumably reflects a shift in the minds of investors towards net carbon zero by the middle of the century which limits the terminal value of companies which are unable to survive the energy transition. Woodside is one of those companies that are better positioned for the transition as a leading LNG producer which will benefit from rising LNG demand in the next 10 years and continued demand for LNG out to 2050 on coal to gas switching in Asia,” added Bernstein.
Woodside’s LNG production capacity could expand by 25% to 10 million tonnes per year (t/y) by 2027 if Scarborough is approved later this year. However, should Scarborough not move ahead due to delays and funding issues, then LNG production could fall to 4 million t/y by the late 2020’s, warned Bernstein.