Woodside Energy Group Limited (ASX: WDS)

Date of Report: June 17, 2025

Executive Summary

This Quality of Earnings (QoE) report provides an analysis of Woodside Energy Group Limited (WDS) for the three fiscal years ending December 31, 2021, 2022, and 2023. The analysis focuses on assessing Woodside's financial performance, the sustainability of its earnings, its business model, and growth trajectory, particularly in light of its significant transformation following the merger with BHP Petroleum in June 2022.

Key findings indicate that Woodside has experienced a substantial increase in scale and operational diversity post-merger. Reported earnings, particularly Net Profit After Tax (NPAT), have shown volatility due to significant one-off items such as merger integration costs in 2022 and impairment charges in 2023. However, normalized EBITDA remained robust, highlighting strong underlying operational profitability. In 2023, Normalized EBITDA was $11.5 billion, compared to $13.7 billion in 2022 and $5.4 billion in 2021 (pre-merger). The decrease from 2022 to 2023, despite higher production volumes, was primarily driven by lower realized commodity prices from the highs of 2022.

Woodside's core earnings appear to be of good quality, supported by strong operating cash flows that consistently cover capital expenditures and shareholder returns. The company's business model as a global energy producer is well-established, though subject to commodity price volatility and the ongoing energy transition. Future growth is significantly tied to the successful execution of major projects like Scarborough and Sangomar. Key risks include commodity price fluctuations, project execution risks, regulatory changes, and the long-term challenges of decarbonization. Further due diligence should focus on detailed project economics, assumptions underlying impairments, and the company's long-term strategy in the evolving energy landscape.

1. Introduction

The purpose of this report is to conduct a Quality of Earnings (QoE) analysis for Woodside Energy Group Limited ("Woodside" or "the Company"). This assessment is crucial for stakeholders considering mergers, acquisitions, or investments, providing insights into the true economic earning power of the company and the sustainability of its financial performance.

The scope of this analysis covers Woodside's financial statements for the fiscal years 2021, 2022, and 2023. The primary source for financial data is Woodside's 2023 Annual Report, published on February 27, 2024. This report can be accessed via Woodside's investor relations website. The BHP Petroleum merger, completed on June 1, 2022, is a central theme in this analysis due to its transformative impact on the Company's scale and financial profile.

2. Company Overview

Woodside Energy Group Ltd is a global energy company, founded in Australia. Following its merger with BHP's petroleum business in 2022, Woodside became one of the top 10 independent energy companies globally by production and the largest energy company listed on the Australian Securities Exchange (ASX). The company's portfolio includes liquefied natural gas (LNG), crude oil, condensate, and natural gas liquids (NGLs). Woodside has operations and exploration activities across Australia, the Americas, Africa, and Asia.

The merger with BHP Petroleum significantly expanded Woodside's asset base, production capacity, and geographic reach. This event is pivotal in understanding the financial trends and earnings quality over the analyzed period, with FY2021 representing pre-merger Woodside, FY2022 reflecting partial-year impact, and FY2023 representing the first full year of the combined entity.

3. Data Analysis

3.1. Financial Performance Overview

Woodside's financial performance over the past three years reflects significant changes primarily driven by the BHP Petroleum merger and fluctuating commodity prices. Revenue saw a substantial increase in 2022 and remained elevated in 2023. Net profit has been more volatile due to one-off items.

Source: Woodside Energy Group Ltd 2023 Annual Report.

3.2. Normalization of Earnings (EBITDA)

To assess the underlying sustainable earnings, reported EBITDA has been adjusted for significant non-recurring items. Key adjustments include adding back impairment losses and one-off costs related to the BHP Petroleum merger. The merger integration was a major event in 2022, while significant asset impairments were recognized in 2023. These adjustments provide a clearer view of the company's core operational profitability.

Note: "Reported EBITDA" is calculated as Operating Profit plus Depreciation & Amortisation, consistent with company disclosures. Adjustments are based on material non-recurring items identified in financial statement notes. Other minor non-recurring items may exist.

Source: Woodside Energy Group Ltd 2023 Annual Report and analyst calculations.

3.3. Revenue Recognition and Quality

Woodside's revenue is primarily derived from the sale of LNG, crude oil and condensate, pipeline gas, and NGLs. Revenue recognition policies are consistent with IFRS 15, with revenue recognized when control of the product transfers to the customer. This typically occurs at the point of loading for shipped products or delivery for piped gas. The quality of revenue is supported by a mix of long-term contracts (especially for LNG) and spot sales, providing some stability alongside market exposure. The merger significantly diversified the product and geographical sales mix. The decrease in revenue in 2023 compared to 2022, despite higher production volumes (187.2 MMboe in 2023 vs 157.7 MMboe in 2022), was primarily attributable to lower average realized prices ($82.8/boe in 2023 vs $98.4/boe in 2022).

3.4. Cost Structure and Margin Analysis

Woodside's cost structure is typical for an E&P company, dominated by production costs (operating expenditure), royalties, and non-cash depreciation, depletion, and amortisation (DD&A) charges. Cost efficiency and control are critical for margin sustainability, especially given commodity price volatility.

Source: Analyst calculations based on Woodside's 2023 Annual Report data.

Normalized EBITDA margins have remained strong and relatively stable post-merger, in the low 80% range, indicating robust underlying profitability from core operations. The decline in operating and net profit margins in 2023 compared to 2022 reflects lower commodity prices and the impact of the significant impairment charge on NPAT, which more than offset increased production volumes.

3.5. Working Capital Analysis

A detailed working capital analysis requires dissection of balance sheet components over time. Generally, for large E&P companies, working capital movements are influenced by commodity price fluctuations impacting receivables and payables, inventory levels (though typically less significant than for manufacturing), and timing of large payments (e.g., royalties, taxes). Woodside's balance sheet reflects substantial current assets and liabilities, typical for its scale. In 2023, total current assets were $10,488M and total current liabilities were $7,028M. Managing working capital efficiently is crucial for liquidity, but major QoE concerns are less common here compared to earnings normalization or cash flow conversion for such entities.

3.6. Cash Flow Analysis

Strong operating cash flow (CFO) is a key indicator of earnings quality. Woodside has consistently generated substantial CFO.

Source: Woodside Energy Group Ltd 2023 Annual Report and analyst calculations.

The CFO consistently exceeds NPAT, which is a positive sign of earnings quality. This indicates that reported profits are well-backed by cash generation. The high ratio in 2023 is partly due to NPAT being significantly reduced by the non-cash impairment charge of $1.5 billion. Even excluding this, cash conversion is strong. These cash flows are critical for funding Woodside's significant capital expenditure program for growth projects and sustaining operations, as well as for shareholder returns and debt management. Net cash used in investing activities was $5,737M in 2023 (2022: $3,697M), reflecting increased investment in major projects. Net cash used in financing activities was $4,583M in 2023 (2022: $4,985M), primarily for dividend payments and debt repayments.

4. Business Model Assessment

4.1. Core Business and Revenue Streams

Woodside is an explorer, developer, producer, and supplier of energy. Its core revenue streams are derived from the sale of:

• Liquefied Natural Gas (LNG): A significant portion of revenue, often sold under long-term contracts but with increasing spot market exposure.
• Crude Oil and Condensate: Sold at market prices.
• Pipeline Gas: Sold domestically in markets like Western Australia.
• Natural Gas Liquids (NGLs): Products like LPG and ethane.

The merger with BHP Petroleum broadened Woodside's portfolio, adding significant oil and gas assets in the Gulf of Mexico and other regions, complementing its traditional Australian LNG strength.

4.2. Key Cost Drivers

The primary cost drivers for Woodside include:

• Operating Expenses (Opex): Costs associated with running production facilities, labor, maintenance, and logistics.
• Royalties and Taxes: Including corporate income tax and resource-specific taxes like Petroleum Resource Rent Tax (PRRT) in Australia.
• Depreciation, Depletion & Amortisation (DD&A): Non-cash expenses related to the capitalised costs of developing oil and gas assets.
• Exploration and Evaluation (E&E): Costs associated with finding new reserves. Can be expensed or capitalized depending on success.
• Capital Expenditures (Capex): Significant investments in developing new projects (e.g., Scarborough, Sangomar) and maintaining existing facilities.
• Financing Costs: Interest on debt used to fund operations and projects.

Commodity prices are not a direct cost but heavily influence profitability by affecting revenue against a relatively fixed (in the short term) production cost base per unit.

4.3. Scalability and Sustainability

Scalability: The business model is scalable through organic growth (developing new fields, expanding existing facilities) and inorganic growth (acquisitions, like the BHP merger). Major projects like Scarborough and Sangomar are key to near-term production growth. However, scalability is dependent on successful exploration, economic development of reserves, and access to capital.

Sustainability:

• Resource Base: Long-term sustainability depends on replacing produced reserves. Woodside's 2P reserves stood at 3,450 MMboe at end-2023.
• Commodity Cycles: The business is inherently cyclical, exposed to volatile oil and gas prices.
• Energy Transition: Increasing pressure from investors, regulators, and society to decarbonize and invest in lower-carbon energy. Woodside is investing in new energy opportunities (e.g., hydrogen, carbon capture and storage (CCS)) and has targets to reduce its operational emissions. This is crucial for long-term social license to operate and investor appeal.

The merger with BHP Petroleum provided enhanced scale and diversification, which can improve resilience through commodity cycles.

4.4. Key Operational Risks and Dependencies

Woodside faces several key operational risks and dependencies:

• Commodity Price Volatility: Earnings are highly sensitive to global oil and LNG prices.
• Geopolitical Risks: Operations in various international jurisdictions expose the company to political and regulatory instability.
• Exploration and Project Development Risks: Uncertainty in finding commercially viable reserves and risks associated with cost overruns or delays in major capital projects.
• Operational Risks: Potential for accidents, equipment failures, and natural disasters impacting production and safety.
• Environmental, Social, and Governance (ESG) Risks: Including climate change regulations, carbon pricing, environmental impact of operations, and community relations.
• Reserve Replacement: The need to continually find and develop new reserves to sustain production levels.
• Market Access and Competition: Securing buyers for products and competing with other global energy suppliers.
• Partner and Joint Venture Risks: Many assets are operated through joint ventures, requiring alignment with partners.

5. Growth Trajectory Evaluation

5.1. Historical Growth Analysis

Woodside's growth trajectory has been significantly altered by the BHP Petroleum merger.

• Inorganic Growth: The merger in June 2022 was the primary driver of the step-change in production, revenue, and earnings capacity from FY2021 to FY2022/2023. Production increased from 91.1 MMboe in 2021 to 157.7 MMboe in 2022 and 187.2 MMboe in 2023.
• Organic Growth: Prior to the merger, growth was driven by projects like the Greater Enfield development. Post-merger, organic growth is focused on progressing major sanctioned projects.
• Revenue Drivers: Revenue growth has been a function of both production volume increases and commodity price movements. The high price environment in 2022 led to peak revenues. In 2023, higher volumes were offset by lower prices.

5.2. Future Growth Potential

Woodside's future growth is underpinned by several key projects and strategies:

• Scarborough Gas Project (Australia): A major LNG development targeting first LNG cargo in 2026. This is a cornerstone project for future LNG production growth.
• Sangomar Field Development (Senegal): Expected to achieve first oil in mid-2024, adding a new producing region and significant oil production.
• Trion Oil Project (Mexico): Sanctioned in 2023, targeting first oil in 2028, expanding Woodside's deepwater oil portfolio.
• New Energy Initiatives: Investments in hydrogen (e.g., H2OK in Oklahoma, Southern Green Hydrogen in WA) and CCS projects aim to position Woodside for the energy transition, though these are longer-term prospects.
• Exploration and Appraisal: Ongoing activities to identify and mature new resource opportunities.

The successful and timely execution of these large-scale capital projects is critical to achieving projected growth. Market demand for LNG, particularly in Asia, is expected to remain robust, supporting Woodside's LNG-leveraged strategy. Oil markets are subject to greater uncertainty due to the pace of transport electrification and economic conditions.

5.3. Industry Benchmarking (Conceptual)

Post-merger, Woodside benchmarks against large global independent E&P companies and integrated energy players. Key benchmarking areas include:

• Production Scale: Now a top 10 global independent producer.
• Cost Structure: Unit production costs and capital efficiency are critical metrics.
• Reserve Life: Comparison of 2P reserve life with peers.
• Return on Capital Employed (ROCE): A measure of profitability relative to capital invested. Woodside reported an underlying ROCE of 17% for 2023.
• Decarbonization Efforts: Progress on emissions reduction targets and investment in new energy compared to peers.

A detailed peer benchmarking exercise would require specific data from competitors, which is beyond the scope of this report but essential for comprehensive M&A or investment due diligence.

6. Key Findings and Quality of Earnings Assessment

6.1. Strengths

• Enhanced Scale and Diversification: The BHP Petroleum merger created a larger, more diversified entity with a global portfolio, reducing reliance on any single asset or region.
• Strong Underlying Profitability: Normalized EBITDA margins are high (consistently ~80%+), indicating robust operational performance.
• Solid Cash Flow Generation: Operating cash flows are substantial and consistently exceed reported net profit, supporting investments and shareholder returns.
• Defined Growth Pathway: A clear pipeline of major projects (Scarborough, Sangomar, Trion) provides visibility on future production growth.
• Experienced Management: A seasoned leadership team with experience in large project development and operations.

6.2. Risks and Concerns

• Commodity Price Sensitivity: Earnings and cash flows are highly exposed to volatile oil and gas prices.
• Project Execution Risk: Successful, on-time, and on-budget delivery of large, complex capital projects is critical and carries inherent risks.
• Energy Transition Pressures: Increasing regulatory, investor, and societal focus on decarbonization poses long-term strategic challenges and may impact access to capital or project approvals.
• Impairment Risks: As seen in 2023, asset values are subject to impairment if long-term price assumptions or project economics deteriorate.
• Reserve Replacement: Long-term sustainability requires continuous successful exploration and development to replace produced reserves.

6.3. Quality of Earnings Summary

Overall, Woodside's quality of earnings is assessed as good, with the following considerations:

• Core Operational Earnings: After normalizing for significant one-off items like merger costs and impairments, the underlying earnings generated from core E&P activities are substantial and demonstrate strong profitability.
• Cash Flow Conversion: The company exhibits strong conversion of earnings to operating cash flow, a key positive indicator of earnings quality. Cash flow from operations robustly supports both capital expenditures and shareholder distributions.
• Accounting Policies: Woodside's accounting policies appear consistent with industry standards (IFRS). Revenue recognition is straightforward. The key areas of judgment, such as impairment testing and decommissioning provisions, are subject to assumptions that should be reviewed in deeper due diligence.
• Impact of Merger: The BHP Petroleum merger has fundamentally changed the company's earnings base. While this has introduced integration complexities (largely addressed by FY2023) and new asset risks, it has also provided scale and diversification benefits.
• Volatility Factors: Reported net profit is susceptible to volatility from non-cash impairments and commodity price swings. Stakeholders should focus on normalized EBITDA and operating cash flow for a more stable view of performance. The decline in revenue and EBITDA from 2022 to 2023, driven by lower prices, highlights this sensitivity but does not necessarily imply a deterioration in the underlying quality of operations, which saw increased production.

6.4. Areas for Further Due Diligence

• Detailed review of impairment testing assumptions: Scrutinize the long-term commodity price, discount rate, and production assumptions underpinning asset valuations, especially for those recently impaired or at risk.
• Project Economics and Execution: In-depth analysis of the economic viability, execution risks, and contingency planning for major growth projects (Scarborough, Sangomar, Trion).
• Long-Term LNG Contract Portfolio: Understand the pricing mechanisms, duration, and counterparty risk associated with Woodside's LNG sales contracts.
• Decommissioning Liabilities: Review the adequacy and timing assumptions for significant decommissioning provisions.
• Taxation: Detailed understanding of current and future tax liabilities, including the impact of PRRT and other resource taxes.
• Energy Transition Strategy: Assess the credibility and financial implications of Woodside's decarbonization targets and new energy investments.

7. Conclusion

Woodside Energy Group Limited has transformed into a significantly larger and more diversified global energy player following the BHP Petroleum merger. Its quality of earnings, when normalized for one-off events, is strong, supported by robust operational performance and substantial cash generation. The company is well-positioned with a portfolio of producing assets and a pipeline of growth projects.

However, like all E&P companies, Woodside faces inherent risks from commodity price volatility, project execution challenges, and the increasing pressures of the energy transition. Future success will depend on disciplined capital allocation, successful project delivery, effective cost management, and navigating the evolving global energy landscape. Stakeholders should consider both the strong underlying financial metrics and the identified risks when evaluating Woodside.

Disclaimer: This report has been prepared based on publicly available information as of the date of the report for illustrative and analytical purposes only. It is not intended as financial advice or a recommendation to buy, sell, or hold any securities. Users of this report should conduct their own due diligence and consult with professional advisors.

© June 17, 2025. Quality of Earnings Analysis.

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