Fitch Ratings has affirmed Australia-based Woodside Energy Group Ltd's Long-Term Foreign-Currency Issuer Default Rating at 'BBB+' with a Stable Outlook.

The affirmation reflects Woodside's solid credit profile as the largest oil and gas producer in Australia. The company, previously called Woodside Petroleum Ltd, has a strong balance sheet, and improved scale and geographical diversification following the merger with BHP's petroleum assets.

Woodside has ample rating headroom, with low financial leverage and strong financial flexibility compared with its planned high capex for its growth projects over the next two to three years. Its credit profile is constrained by its smaller scale than Fitch-rated peers in the 'A' rating category and a lack of diversification given its pure upstream earnings.

Key Rating Drivers

Improved Scale, Diversification Post-Merger: Woodside, a leading Australian liquefied natural gas (LNG) producer, expanded reserves and production volume, and improved its geographical and product diversification after the merger with BHP's petroleum assets in June 2022. Proved reserves increased to 2.3 billion barrels of oil equivalent (boe) by end-June 2022 (2021: 1.6 billion boe) while Fitch expects production volume to more than double to around 190 million boe (mmboe) by 2023 (2021: 91mmboe) upon full-year contribution from the newly merged assets.

Australia will still account for around 70% of Woodside's total production over the medium term, with the rest mainly from the Gulf of Mexico and Senegal, with Sangomar project reaching first oil by 2H23.

LNG Remains Largest Production Contributor: Earnings from LNG are more stable than crude oil as offtake for Woodside's LNG is mostly contracted for the long term with prices linked to crude prices. After the merger, LNG remains the largest contributor to production volume, but it will reduce to 40%-45% (from 80% previously) with more crude oil in its production until a new LNG project completes in 2026. The lower contribution from LNG is partly offset by greater exposure to Australian domestic gas, typically sold under term contracts, which will make up about 15% of total output (2021: 3%).

High Oil & Gas Prices: Fitch projects Woodside's EBITDA to more than double by 2023 from USD4.3 billion in 2022, driven by higher volume post-merger and stronger oil and gas prices. However, EBITDA will likely fall from 2024 as prices normalise under our assumptions. Woodside has been increasing exposure to spot gas contracts to capitalise on strong global prices through third-party trading. It aims for spot gas trading to reach 25% of overall gas sales volume (2021: 16%). These volumes are mainly from third parties, while Woodside's production is mostly under long-term contracts.

Cash Flow Supports Capex Commitments: Woodside's strong cash flow from operations is sufficient to fund the majority of its committed capex (based on current equity interest in its projects) following positive final investment decisions (FID) on Scarborough and Pluto Train 2, while maintaining its dividend payout target of at least 50% of net profit after tax for the next two to three years.

Commitments for key projects are substantial with Woodside's guiding USD9 billion until 2024. Woodside continues to seek to cut its equity stake in Scarborough, which may reduce its investment costs, as it did when it completed the sale of a stake in Pluto Train 2 recently.

Sufficient Rating Headroom: Fitch assesses that Woodside has large rating headroom and strong levers to manage its capex commitments over the next two to three years, based on its strong balance sheet and flexibility to dispose of project equity stakes to reduce capex if required. Fitch expects Woodside's free cash flow to remain positive until 2023, after which it will turn negative as oil and gas prices normalise while investments remain high.

Scale, Business Diversification Limit Profile: Woodside's operating scale is smaller in terms of reserves and daily production compared with Fitch-rated oil and gas peers in the 'A' rating category. Woodside also does not have downstream integration or business diversification, unlike certain higher rated peers.

Potential Investments Not Factored In: Woodside has substantial proved and probable reserves, but Fitch has not factored in any growth projects that have not received positive FID into the rating case as the timing of development is uncertain and Woodside's equity interests in these projects may change upon FID.

Derivation Summary

Woodside's rating at the same level as PTT Exploration and Production Public Company Limited's (PTTEP, BBB+/Stable) standalone credit profile of 'bbb+'. PTTEP's gas portfolio, which accounts for 70% of its production, is stable and benefits from long-term take-or-pay contracts that are linked to crude price indices. Similarly, Woodside benefits from the lagged impact of oil prices on its LNG contracts and diversification benefits from its domestic gas portfolio, which together make up 60%-70% of Woodside's total production.

Compared to Santos Limited (BBB/Stable), Woodside has larger production and reserves but lower financial leverage. Santos, however, has higher exposure to domestic gas, resulting in better earnings diversification and stability as the majority of the contracts are fixed price with annual adjustments linked to changes in the Australian consumer price index.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Oil prices of USD100/barrel in 2022, USD85 in 2023, USD65 in 2024 and USD53 thereafter, in line with Fitch's oil price deck.

Production to reach 190mmboe by 2023 and average at 200mmboe a year between 2024 and 2025.

Dividend pay-out ratio of 55%-70% of net profit between 2023 and 2025.

Capex of USD4.9 billion in 2022, and total of USD13.6 billion between 2023 and 2025.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action is unlikely as companies rated by Fitch in the 'A' rating category are generally larger and more diversified, including in downstream operations, than Woodside.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Net debt/EBITDA or FFO net leverage sustained above 2.0x (2021: 0.6x and 0.7x, respectively)

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Substantial Liquidity: Woodside is supported by a strong liquidity buffer of USD7.92 billion (2021: USD6.13 billion), consisting cash at bank of USD4.62 billion and committed undrawn facilities of USD3.3 billion end-June 2022. The company's debt maturities are well spaced out with no material debt maturing over the 24 months.

Issuer Profile

Woodside is Australia's largest independent oil and gas exploration and production company and a leading LNG producer. The merger with BHP's petroleum assets gave the company exposure to assets in the Gulf of Mexico, Trinidad and Tobago.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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