Rating Action: Moody's affirms Woodside's Baa1 ratings; outlook remains negativeGlobal Credit Research – 15 Dec 2021Sydney, December 15, 2021 — Moody's Investors Service ("Moody's") has affirmed the Baa1 issuer rating of Woodside Petroleum Ltd. At the same time Moody's also affirmed the (P)Baa1 rating on the backed senior unsecured medium-term note (MTN) program and Baa1 backed senior unsecured ratings of Woodside Finance Limited. The outlook is negative."IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."RATINGS RATIONALEThe affirmation of Woodside's ratings and the negative outlook reflect Moody's expectation that the company's standalone credit profile and credit metrics will weaken from the significant spending and execution risks associated with the recently approved Pluto-Scarborough LNG growth project.Until a successful merger with BHP's (BHP Group Limited, A2 stable) petroleum business completes, and/or further sell downs of project stakes occur, the negative outlook continues to reflect Moody's expectation for ongoing execution and funding risks associated with Woodside's expansion projects. Given the large scale and funding needs of these projects, Moody's expects that without the merger completing, or further reductions in Woodside's stake in its projects, that credit metrics would weaken to near, or below, the current rating tolerance thresholds during project development.However, the affirmation also considers the potential positive impacts from a successful merger, which would significantly increase the scale of Woodside's production and reserves, while materially improving diversity and providing substantial additional cash flow to fund growth. As such, based on Moody's current assumptions, the rating agency expects that the rating could be stabilized on successful completion of the merger.If the merger does not complete as planned, Woodside's credit profile could weaken further, in part, reflecting BHP's put option for its stake in the Scarborough upstream portion of the $12 billion Pluto-Scarborough LNG project. If the put is executed, Woodside would be required to purchase BHP's stake in the project for around $1.0 billion, which would add to Woodside's already significant funding needs for the project and increase its stake in the project without the additional cash flow that a successful merger would bring. Woodside could also be required to make additional payments to BHP, including reimbursement fees of around $160 million. Under this scenario, Moody's expects that credit metrics would weaken to below its tolerance levels for the rating and that the company's exposure to potential execution risks from the project would increase.However, Woodside is continuing to progress a potential reduction of its equity stake in the Scarborough upstream project and a sell down of its around 82% stake in its $4.6 billion (100% basis) Sangomar project in Senegal, both of which would bring in proceeds to help fund Woodside's large capital needs over the next several years. Selling down these stakes would also reduce the company's capital requirements for these projects and its exposure to potential execution risks.Woodside is progressing with the merger with BHP's petroleum division following the signing of a binding share sale agreement (SSA) in November 2021. Under the terms of the agreement, Woodside will acquire the entire share capital of BHP Petroleum International Pty Ltd (BHP Petroleum) in exchange for new Woodside shares. A successful merger with BHP Petroleum would be credit positive as it would approximately double production levels, materially increase reserves, broaden operational and geographic diversity, and allow the company to benefit from high margin production over the next several years, which would materially increase cash flow generation and support project development.At the same time as announcing the binding SSA for the merger, Woodside also sanctioned the $12 billion Pluto-Scarborough LNG project. The sanctioning of this project followed an equity stake sale to GIP for a 49% share of the downstream Pluto Train 2 LNG processing portion of the project for an $835 million accelerated capital contribution. The downstream portion of the project represents around $6.3 billion of the $12 billion total project cost on an 100% basis.The sell down of Woodside's share in Pluto Train 2 is in line with management's target to reduce its stakes in growth projects to help reduce funding needs and lessen exposure to execution risks associated with its growth ambitions. While Moody's sees the stake sale as supportive for Woodside's credit profile, the rating agency notes that under the terms of the agreement Woodside retains an increased exposure to cost overruns up to the level of the accelerated capital contribution paid by GIP. However, under these terms Woodside also retains the benefits if the project comes in under its expected budget.The Baa1 rating continues to reflect Woodside's large and diversified hydrocarbon reserve base and consistent production levels. Woodside's NWS LNG, Pluto LNG, Wheatstone LNG and domestic gas operations continue to benefit from long-term offtake contracts with primarily highly rated counterparties, which will underpin volumes and benefit from more stable pricing mechanisms that helps to provide some buffer to the volatility in oil and gas prices. Woodside also continues to benefit from low production costs across its operations. The company's low-cost position and stability from contracts is evident in its ability to generate peer leading EBITDA margins averaging around 75% for the last five years.The rating is balanced against Woodside's: (1) exposure to the cyclical hydrocarbon industry, which can lead to significant swings in earnings and cash flow; (2) concentration risk and the reliance on 3 LNG plants for the vast majority of revenue and earnings; (3) increasing carbon transition and regulatory risks facing upstream companies as the world moves towards cleaner energy, and; (4) the capital intensity of its current and future projects, including Scarborough-Pluto LNG, which will come with significant execution risks.OUTLOOKThe negative outlook reflects Moody's expectation that, without a successful completion of the merger or further equity reductions in its large growth projects, Woodside's credit metrics will be at weak levels for the rating, which could lead to a downgrade without other initiatives to improve its financial profile.ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) RISKSESG attributes have limited credit impact today but have the potential to pressure Woodside's ratings over time (CIS-3). Woodside has high environmental risk (E-4) exposure and high social risk (S-4) exposure partially mitigated by its conservative financial policies, solid governance practices and low production costs.Woodside will continue to face a high level of environmental and social risks largely driven by a high-risk exposure to carbon transition, as well as changing demographic and societal trends from the greater community focus and push by global governments to reduce carbon emissions and meet net zero pledges to limit climate change. However, Woodside's primarily gas production, with a significant exposure to LNG sold to Asia, where gas will play a key role in transition strategies, helps to mitigate this risk. Woodside also has a 2030 target to reduce scope 1 and 2 emissions by 30% and aspiration for net zero by 2050.The company has also recently guided that it targeting to spend around $5 billion on new energy projects by 2030. Woodside has several project opportunities it is considering with four potential projects expected to progress over the next several years focused on hydrogen, ammonia and solar.Governance risks are neutral-to-low (G-2) reflecting Woodside's conservative financial policies, good governance, and a successful track record of executing on large projects and meeting guidance. Woodside's conservative financial management is highlighted by its excellent liquidity levels, low gearing and conservative gearing target, as well as its track record of issuing equity and implementing dividend reinvestment programs to support credit metrics.LIQUIDITYMoody's considers Woodside's liquidity as excellent benefiting from around $3.0 billion of cash and around $3.0 billion of availability under committed credit facilities for June 2021.This combined with operating cash flow of around $2.7-3.0 billion under Moody's base case assumptions, will be more than adequate to cover cash uses which includes capital expenditures (net of sales proceeds) and dividends (net of DRP proceeds) of around $3.6-3.8 billion over the next 12 months.A successful merger would further improve Woodside's liquidity as it would add significant cash flow generation to support Woodside's funding needs for its large growth projects.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSGiven the negative outlook, a ratings upgrade is unlikely over the next 12-18 months reflecting our expectation for volatility in commodity prices and the increased funding requirements and execution risks stemming from the company's large project pipeline.Woodside's outlook could be stabilized if: 1) the merger is successfully completed as planned, or 2) the company executes on further reductions in its equity stakes in its large projects, such that credit metrics will be sustained at appropriate levels for the rating through project development. Specifically, the ratings could be stabilized if RCF/net debt remains above 35% on a sustained basis.Woodside's rating could be downgraded if: 1) oil prices remain low for a prolonged period such that there is a significant decline in earnings and operating cash flow; 2) the merger does not complete and there is not a corresponding reduction in equity stakes in major projects; the company pursues a more aggressive financial policy, which result in weaker credit metrics, and/or; 3) liquidity declines meaningfully.Specifically, credit metrics indicative of downward pressure include Woodside's RCF/net debt sustained below 35% and/or EBITDA/Interest expense falling below 6.0x.The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1284973. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.BACKGROUNDWoodside Petroleum Ltd (Woodside) is an Australian independent exploration and production (E&P) company, with an annual production of around 100 million barrels of oil equivalent (boe), and proved and probable reserves of around 1.04 billion boe as of 31 December 2020.Woodside's operations produce LNG, crude oil, condensate, pipeline gas for domestic consumption and LPG. Woodside operates the significant NWS joint venture in the state of Western Australia. The project contributed 31 MMboe of LNG in 2020. The company also operates the Pluto LNG project, which contributed around 44 MMboe of LNG and has ownership stakes in the Wheatstone LNG project, which delivered around 15 MMboe for the year.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Matthew Moore Senior Vice President Corporate Finance Group Moody's Investors Service Pty. Ltd. 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