1. Introduction

1.1 Executive summary

Woodside Energy Group Ltd is in a strong financial position, with close to zero net debt and a portfolio of assets producing strong cash flows. Current company management and the board intend to use this position to pursue the “next wave of growth opportunities'',^[1] including potential expansion into new, high-risk emerging markets in Mexico, Senegal, Trinidad and Tobago, and Timor Leste. This strategy, however, would mean growing production in a difficult industry environment and against scientific consensus on the urgent need to reduce absolute greenhouse gas emissions. The oil market is facing long-term structural demand decline, and larger, low-cost Organisation Of The Petroleum Exporting Countries (OPEC) producers are forecast to capture an increasing market share. The success of a production growth strategy will be dependent on both project execution and the future oil prices, with history indicating that Woodside needs an appreciating oil price to generate long-term shareholder value from production growth.

ACCR has undertaken a financial analysis to test whether Woodside's current production growth strategy is an optimum approach to delivering long-term shareholder returns. We found that Woodside’s portfolio of unsanctioned projects does not appear to be a material source of value add, at 2.5% of market capitalisation. Furthermore, this portfolio is increasingly dominated by projects with higher country and project risk profiles, and results in significant expenses on exploring and progressing non-viable projects. The portfolio is also sustained by investment criteria which are considerably more bullish than most large European and US oil companies.

We have assessed Woodside’s existing production growth strategy, compared to an alternate strategy wherein capital which is currently allocated to production growth is instead used to pursue share buybacks. Our analysis suggests that re-allocating capital to a share buyback offers more Net Present Value (NPV) upside than the company's existing production growth strategy, while avoiding the constellation of risks attached to production growth.

Woodside’s current lack of alignment with global temperature goals has been established across a range of sources,^[2] and is a persistent source of risk and investor discontent.^[3] The projected lifecycle emissions of Woodside’s unsanctioned growth portfolio is 536 MtCO2e. Our analysis demonstrates that a strategy which delivers value accretion without further emissions growth is available to Woodside.

1.2 Key findings

Woodside's unsanctioned projects are not a material source of value add.

• The NPV of Woodside’s unsanctioned projects represent 2.5% of market capitalisation. These projects have a combined capex of 41% of Woodside’s market capitalisation, suggesting even minor slips in project execution will result in value destruction.
• Acquisitions and exploration do not appear to be attractive options to replenish the project portfolio. For example, Woodside has spent $1.1 billion (nominal) acquiring the Sangomar oil and gas field in Senegal that had an estimated NPV of negative $703 million at Final Investment Decision (FID).

A “capital return” strategy appears to create more value, with lower risk and fewer emissions than a “production growth” strategy.

• As a portfolio, Woodside’s unsanctioned projects create less value than a share buyback, assuming investors see Woodside’s shares at a 10% discount to the current NPV.
• The few projects that do create incremental value over a share buyback, do not justify the expense of Woodside maintaining its project development capabilities. This is an opportunity for a simpler, leaner organisation.

Chart 1-1: Value of delivering each unsanctioned project compared to using the capital for a share buyback

• Woodside’s production growth strategy results in significant expenses on exploring and progressing non-viable projects. For example, Calypso does not appear to be a viable project, despite more than $500 million having been spent on exploration.
• Cost and schedule increases for Sangomar highlight that Woodside does not always deliver on FID guidance. Woodside’s last major project, Pluto, also overran its cost and schedule. When accounting for historic cost and schedule realities, Pluto’s NPV was negative $2.8 billion at the time of FID (Real 2007).
• A capital return strategy delivers value accretion without further emissions growth. The projected lifecycle emissions of Woodside’s unsanctioned growth portfolio is 536 MtCO2e. Woodside’s corporate strategy is not aligned with a 1.5°C pathway and its portfolio is not well placed for a low carbon transition. A share buyback offers more shareholder value, without more emissions risk.

A production growth strategy may face increasing challenges

• Historically, chasing production growth hasn't added value when the oil price has stayed flat. Over the past 16 years Woodside’s total shareholder return is only 3.5% p.a. while production has doubled. Over a 30-year period, Woodside’s total shareholder return (TSR) seems to be more closely related to the oil price than production growth.

Table 1-1: Woodside Total Shareholder Return relative to production growth and the oil price

• Woodside is facing a difficult longer term industry environment. According to the 2023 International Energy Agency (IEA) Net Zero Emissions by 2050 (NZE) scenario, OPEC members are forecast to increase their share of oil supply from 2021 levels of 35% to 52% by 2050. Even in the IEA Stated Policies (STEPS) scenario, the OPEC market share is forecast to increase to 43% by 2050.
• Woodside’s unsanctioned project portfolio is increasingly dominated by projects with higher country and project risk profiles. Woodside should account for this in its capital allocation framework, but it’s not clear that it does.
• Woodside’s fossil fuel investment criteria appear to be more bullish than most large European and US oil companies, with higher oil price forecasts and lower new project Internal Rate of Return (IRR) hurdle rates relative to the peer group. The recently approved Mexican project, Trion, would not have met most large European hydrocarbon companies’ investment criteria.

1.3 Recommendations

A “capital return” strategy appears more attractive to shareholders than a “production growth” strategy. We recommend that Woodside consider a capital return strategy, wherein capital which is currently allocated to production growth is instead used to pursue share buybacks. This would align Woodside more closely with longer-term industry dynamics, and current shareholder distribution trends of peers. It would also avoid significant project execution risk.

Appendix 1 contains a list of questions that investors could consider asking Woodside’s board and management.

Download Woodside’s growth portfolio: what’s in it for shareholders? | August 2023 |

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