Syndicate Report - Santos and Woodside PDF

Preview

Summary

Syndicate Report...

Description

Syndicate Report: Santos & Woodside

Lecturer: Jeffrey Wong Class: Term 2, 2020 Due date: 03/06/2020 Presented by: Aditya Mehta (45577331)

Contents Executive Summary………………………………………………………………………………………………….….2 Introduction and Background ………………………………………………………………………………….….3 Trends in Stock Prices……………………………………………………………………………………………….…4 a) The Global oil prospect………………………………………………………...…..…………………….4 b) Key observations in stock prices ………………………………………………………………….….6 Oil & Gas Sector: At a glance………………………………………………………………………………….……7 Competitive Environment: PESTEL & Porters 5 forces…………………………………………….……9 Financials Analysis………………………………………………………………………………………………….….12 c) Time series analysis……………………………………………………………………………………….12 d) Key Observations: Cashflows & Items of Balance sheet………………………………….16 e) Key Ratio Analysis………………………………………………………………………………………….19 f) Du Pont Analysis……………………………………………………………………………………….……21 The Way forward…………………………………………………………………………………………………….….23 Recommendations………………………………………………………………………………………………….….24 Appendices…………………………………………………………………………………………………………………25 Appendix: Consolidated Financial Statements………………………………………...………………25 Appendix: Notes to Ratio calculations………………………………………………………………………30 References………………………………………………………………………………………………………………….30

Executive Summary P a g e 1 | 33

The report has been prepared to provide a financial analysis of Woodside and Santos for the interest of potential investors. A review of the historical and expected financial performance of both the businesses is conducted to represent whether the businesses offer a sound investment opportunity. The analysis takes the form of a quantitative framework to understand the overall industry and the positioning of the two companies as well as qualitative frameworks to highlight the key trends observed in their financial performance. An overview of the global oil economy and its impact of the share prices of the two companies is discussed to understand the impact on oil-linked revenues. Further, the recent impact of economic downturn due to Covid19 is factored in our recommendation to the potential investors. The industry is well positioned & highly regulated with Santos and Woodside both constituting a significant portion (>20%) of the market share, innovative business techs and their support to run business sustainably. The sector is highly capital intensive and subject to price volatilities as revenue are closely linked to changes in oil prices, hence the entry barriers are very high. The financial strength of Woodside over the comparative period gives a favorable outlook to our recommendation as compared to Santos due to its strong capital structure vis a vis it’s line of debt, ability to sustain future impact in oil & gas prices, steady operating cashflows, cash coverage and other key financial indicators discussed broadly in the report. Further other qualitative measures discussed in report favor the analysis in the report. As such, based upon or analysis and overall industry prospects, we recommend buying Woodside shares for their growth potential.

P a g e 2 | 33

Introduction & Background Santos and Woodside are among the largest oil & gas producing companies in Australia. They are both in operations since 1954 and registered on ASX under the code ‘STO’ for Santos & ‘WPL’ for Woodside. The analysis of the report is measured on aspects including the Industry type, Geography, M-Cap, Products traded and other such factors discussed in report. Below table gives an overview of both the businesses.

Info

Santos

Woodside

Type of business Key geographies covered Production Capacities and Capex

Oil and Gas exploration & production Australia, Indonesia, Singapore, Papua New Guinea and Vietnam Recorded a production of 75.5 mmboe and Capex of $1,016 mn in 2019

Recorded a production of 89.6 mmboe and Capex of $1,192 mn in 2019

Mcap

$11.33 bn

$22.02 bn

Latest Stock Price

$5.37 as on 29/05/2020

$22.89 as on 29/05/2020

Yield and P/E

3.02% & 11.76x

5.91% % 44.04x

HSBC - 26.3% Citicorp Nominees Pty Ltd - 22.2% J P Morgan - 15.8%

HSBC - 28.6% Citicorp Nominees Pty Ltd - 12.2% J P Morgan - 16.9% BNP Paribas - 7%

S&P 'BBB-' dt Aug’2019 Four Tier 1 and four Tier 2 loss of containment incidents, which is a significant improvement on 2018. There were no environmental incidents of moderate or greater consequence. There is a sustainable 101 ktCO2e emission reduction improvement.

S&P 'BBB+' dt Apr’2020

Largest Shareholders Long term Credit Ratings

Safety & Environment

Oil and Gas exploration & production Australia, Peru, Ireland, Bulgaria, Myanmar, Canada and Gabon

No Tier 1 or Tier 2 loss of primary containment process safety event. A total of 167kt CO2-e in sustainable emissions reductions improvements was delivered.

P a g e 3 | 33

Trends in Stock Prices The Global Oil Prospect: The oil prices have been high — bouncing around $100 per barrel since 2010 — because of soaring oil consumption in countries like China and conflicts in key oil nations like Iraq. Oil production in conventional fields couldn't keep up with demand, so prices spiked. High prices spurred companies in the US and Canada to start drilling for new, hard-to-extract crude. This led to a boom in "unconventional" oil production. Further in the line, there was a civil war in Libya . Iraq was facing threats from ISIS. The US and EU slapped oil sanctions on Iran and pinched its oil exports. Those conflicts took more than 3 million barrels per day off the market. By late 2014, world oil supply was on track to rise much higher than actual demand, as the chart below. A lot of unused oil was simply being stockpiled away for later. So, in September, prices started falling sharply. Saudi Arabia didn't want to give up market share and refused to cut production — in the hopes that lower prices would help throttle the US shale boom. That was a surprise. So, oil went into free-fall. A combination of weaker-than-expected demand and steadily rising supply caused oil prices to start dropping which reach as low as below $40 per barrel by 2015. The downward swing in oil prices in 2016 raised a similar specter of low oil prices that might have lasted for a similarly extended period. However, 2017 broke the trend, doubling the price of the 2016 lows. In 2018, the threat of sanctions on Iran, global demand that continues to rise and the deteriorating situation in Venezuela were some factors that contributed to rise in oil prices, however, the lowering of sanctions by US predictably plunged the oil prices as it lowered the business for shale oil producers and allowed China to purchase oil from Iran instead of US due to trade wars. The current impact of Covid19 has seen a further slump in oil prices due to the unprecedented economic situation leading to deferrals of budget and economic growth targets by various nations.

P a g e 4 | 33

Stock Price Chart (Santos & Woodside)

P a g e 5 | 33

(Source: Yahoo finance) Key reasons for movements in Stock Prices (Santos and Woodside): The revenue streams for Santos & Woodside are closely linked to global price of oil. Hence, global oil prices have had a dampening effect on the revenues and profitability as historically mapped in comparison chart and highlighted due to the reasons above. The slump in the oil prices caused significant impairment of their oil & gas assets which had an impact on stock prices of both the entities. As a result, the share prices for Santos which were as high as $13 per share in 2014 plummeted to less than $3 per share during 2016. The headwinds caused by the global oil prospect led Santos to retain majority of its short-term deposits and cash assets in business. On the contrary, Woodside, being equally impacted by the shock of global oil prices saw its stock price drop from as high as $ 43 per share in 2014 to $24 per share in 2016. Recovering from the aftershocks, both the firms have made strategic acquisitions and raised equity to support increase in cashflows (highlighted in table for analysis of cashflow statement). Further, since 2018, the recovery in oil prices also backboned the growth in stock prices where ‘Santos’ saw an increase in share price up to $7 per share during Nov’18 and ‘Woodside’ saw an increase up to $39 per share during the same month. The stock prices have been erratic since then and recently the impact of global pandemic has had an adverse impact in stock prices. Although same is unprecedented, Impact on stock prices can be assumed to remain long.

Oil & Gas Sector: At a glance P a g e 6 | 33

Brent Crude Oil Prices

P a g e 7 | 33

Competitive Environment

P a g e 8 | 33

P a g e 9 | 33



Both the firms are strategically aligned to the external environment. With a vintage of more than 60 years, the firms have occupied a stable market share, leverage on innovative techs to support production

P a g e 10 | 33



and exploration activities and ensure minimum emissions and water wastage to engage their units sustainably. The growth prospect of businesses is closely impacted to the changes in oil prices and recent covid19 impact which has pushed the oil prices further down have significant impact on their production cuts. However, both are leading energy firms in business and have sufficient aid from investors and support of governments to support their future growth prospects.

P a g e 11 | 33

Financial Analysis Time Series Analysis

a)

Sales Vs NPAT:

Sales vs NPAT (US$mn) Revenue - Santos 6000 4873 5000 4033 4000

Revenue - Woodside

NPAT- Woodside

5240 3660

5030 3908 3107

3000 2000 1000674 382 0 2019 -1000

NPAT- Santos

1467 630 2018

1120 -360 2017

4075 2594

2442

973 113 2016 -1047

2015 -1953

-2000 -3000

Note: 1.

Woodside is able to maintain higher sale volumes as compared to its peer Santos over the five comparative financial years however the sales volumes for Santos are showing a steady rate of increase whereas for Woodside, an erratic movement in yearly sales is observed. 2. Woodside has been consistently showing a growing trend in profitability until 2019 when Santos surpassed Woodside with a closing profit of $674 mn as compared to $382 mn reported by Woodside. 3. Key reason observed for drop in profitability for Woodside from 28% in 2018 to shrinking at 8% by 2019 is due to impairments of their Kitimat LNG asset up to $737 mn 4. Santos has been in losses till 2017 as highlighted in graph above, one of the key reasons for reported losses can be trailed back due to huge impairment losses in oil & gas assets further discussed in sections below.

P a g e 12 | 33

Trend Analysis basis Indexation: -

Santos Revenue - Santos

Cash Cost of Sales

NPAT- Santos

200 165 150 157

152 150

143 127

100

130 106

50

54

0 2019 (35) -50

100

18 2018 (32)

2017

2016

2015

Woodside Revenue - Woodside 1400

Cash Cost of Sales

NPAT- Woodside

1298

1200 991

1000

861

800 600 338 400 20097 73 0 2019

104 74

78 50

81 59

100

2018

2017

2016

2015

Table of contents: -

P a g e 13 | 33

1.

The revenue growth for Santos outpaced Woodside basis the indexation compared above with base year considered as 2015. The growth trend in revenue for Woodside is erratic whereas for Santos is showing an upward graph. 2. The revenue growth for Woodside outstripped the growth in cash cost of sales and NPAT grew at a faster rate than revenue. 3. The revenue growth rate for Santos has underperformed as compared to its cash cost of sales until 2019. The negative growth rate for NPAT taken for reference reflects the reduction in losses. Note (Actual Figures): -

EBDITA Vs Impairment loss Vs NPAT

Santos #REF!

EBITDA

Impairement Losses

NPAT

3000 2295 2000

2001

1000 674

630

01 (61) 2019 -1000

(100) 2018

427 2017 -360 (938)

2016 -463

2015

-1047 (1561)

-2000

-1588 -1953

-3000

(2854)

-4000

P a g e 14 | 33

Woodside #REF!

EBITDA

Impairement Losses

NPAT

5000 4000

3775

3000 2794

2918

2734

2000

1980 1467

1000 382 0 1 2019 (737) -1000

(39) 2018

1120 (2) 2017

973 113 2015

0 2016

(1083)

-2000

Table of contents: -

1.

Earnings for ‘Santos’ has been affected primarily due to higher impairment losses on account of groups exploration/evaluation assets and oil & gas assets where the carrying value has been considered to be higher than the recoverable amount. These assets are primarily subsurface assets and plant & equipment of the group. As per the auditor comments, impairment losses are attributable to the dampening in oil prices and the decrease in impairment prospectively over the years is a function of higher sales revenue for santos as a result of favorable product prices and volumes. 2. Earnings for ‘Woodside; has been impacted the most in the years 2015 and 2019 due to impairment losses. As per the audit report, in the year 2015, reported profit for the year was driven by the sharp fall in commodity prices and asset impairments. Impairments are mostly driven by the collapse in near-term crude oil prices and an approximate 20% reduction in our long-term pricing assumptions for the purpose of determining asset values. Furthermore, in year 2019, the reported earnings reflect the impairments of their Kitimat LNG asset.

P a g e 15 | 33

Key observations from movement in Cash flows and items of Balance Sheet: Year

Santos

Woodside

Majority of the cashflows from operations were used to make repayment of foreign borrowings of $1474 mn and dividend payment of $251 mn during the year. Increase in exploration and evaluation assets relate to capital expenditure towards value accretive acquisition of Quadrant Energy and other drilling sites.

2019

Increase in oil & gas assets pertain to right of use assets raised as a result of adoption of accounting standard on leases. Increase in Other financial assets pertain to amount held towards acquisitions.

2018

Profitability for the year was hit hard as a result of impairment losses of $737 mn relating to Kitimat LNG asset and further due to additional impacts from extended plant turnarounds and tropical cyclone veronica. Business raised new debt including $1500 mn through unsecured bonds and $200 mn through term loan & used the existing cashflows from operations to fund for the existing capital expenditure in exploration & oil and gas properties as well as towards payment of dividends.

Accumulated losses during the year on account of huge impairment in oil & gas assets in past is slightly mitigated with increase in profitability. However, the books remain sufficiently capitalized in proportion to its debt which has significantly reduced on account of payment of banks secured and unsecured loans & long-term notes.

Increase in provisioning is on account of revision of discount rates and change in estimates made during the year.

Santos used internally generated cashflows and debt from banks in the form of secured and unsecured lending as well as long term notes to the tune of $1193 mn to fund its acquisition of 100% shares of Quadrant energy for a purchase consideration of $1574 including goodwill arising on acquisition. This acquisition has led the firm to establish a stronghold in western Australia oil & gas business. The deferred tax liability arising as a consequence of acquisition is recognized in balance sheet.

During the year, business has generated $3.3 bn in operating cashflows and raised equity of $1.9 bn to deliver their growth plans which helped them to push revenue complimented with ramp up of their Wheatstone LNG and strong LNG reliability. The cashflows supported capital expenditure in oil & gas assets as well as towards purchase of ExxonMobil's interest in Scarborough assets for $444 mn to support growth and raise equity ownership in Scarborough up to 75%

P a g e 16 | 33

There is further a sharp increase in long term provisioning of oil and gas assets post acquisition of Quadrant to factor any future costs associated with removal & restoration of oil and gas facilities Business has also made further investment in its subsurface assets and plant and equipment facilities. During the year Santos has also divested its Asian asset portfolio considered to add value from its latelife non-core assets.

The increase in liquidity also supported part repayment of interest-bearing liabilities including bilateral facilities and US bonds as well as divided payment.

The net decrease in movement in cashflows is majorly attributable towards the payment of interest bearing liabilities & other financial liabilities related to derivative instruments.

2017

To fund the repayment of liabilities, business has utilized its existing spillover of free cash assets & cashflows from operations as well as resources from raising equity & disposal of its oil and gas assets as a result of impairment. Further, Santos recognized an impairment charge against the carrying value for GLNG & non-core Ande Lumut asset in Indonesia of up to $930 mn. The impairment was primarily due to lower forecast US$ oil prices.

Funds generated through operations and fund drawn through bilateral facilities in US $ and US bonds were used majorly towards repayment of Bilateral facilities, syndicate loans and JBIC facilities availed by business. The cashflows further supported the capital expenditure and dividend payment.

P a g e 17 | 33

Between Mid-2014 to 2016, global economy faced one of the largest oil price declines & booming US shale oil production played a significant role in the oil plunge. Another key driver was in fact a supply glut reinforced by a weakening demand prospect.

2016

In 2016, Santos implemented an oil price hedging strategy to safe guard against potential losses on fluctuations in oil prices since its business relies on a range of long- & short-term contracts and its LNG sale price is closely linked to global price of oil. Hence, global oil prices had a dampening effect on its revenues and profitability. Santos raised equity through institutional placement to the tune of $751 mn and disposed of some of its non-core oil & gas assets for $447 mn used to repay debt and invest in additions to subsurface assets and plant and equipment. With high headwinds from plummeting oil prices & impairments to its GLNG units, majority of the short-term deposits and cash at bank was retained in business.

2015

During 2014, the Brent crude fell almost 50% in the fourth quarter, at its lo...