Woodside

Woodside provides a fascinating case study for risk governance. As a major oil and gas producer, the firm

must grapple with the world's transition to new energy. CEO Meg O'Neill was formally appointed to the

role in August $2021.$ Since then Woodside has announced its intention to proceed with the development of

the Scarborough gas field and another major gas processing plant $($Pluto Train $2).$ The firm also announced

its intention to purchase BHP$\text{'}$s petroleum business and this merger proceeded on $1$ Jun $2022.$ Woodside is

making these major strategic decisions at a time when oil and gas prices have recently displayed unusual

volatility.

A$.$ Market Risk Assessment

For Part A submit a written report containing your risk assessment. No Excel file is to be submitted but you

can paste screen shots into your report as appropriate.

Woodside is headquartered in Perth, Western Australia. The resources it produces are all priced in US

dollars, so like some other resources firms, the company reports in US dollars. Woodside produces LNG as

well as oil, but as the price of LNG is linked to the price of oil, we will do the analysis in terms of barrels of

oil. This is a simplification, but is consistent with much of Woodside's reporting which provides summary

information in barrels of oil equivalent $($boe$).$

Let's assume the following:

Over the next year Woodside produces $8$ million boe each month.

Initially assume that all its product is sold at prevailing spot prices

You can assume that the oil price and the AUD at the end of the month applies for the entire

month.

The business incurs costs $($production and sales$)$ in both AUD and USD. Assume these are AUD $200$

million and USD $80$ million respectively per month. Costs are fixed for the horizon of this analysis.

In August $2023($i$.$e$.$ month $0)$ the oil price is USD$85\mathrm{.}42/$barrel and the exchange rate is USD $0\mathrm{.}6485$

per AUD, so gross profit for Woodside for the month will be USD $473\mathrm{.}66$ million.

Cash on hand is currently $$3$ billion. The cash reserves are an important risk mitigant for Woodside,

especially given the challenge of accessing capital markets. Cash can be drawn down if necessary

but the board would be averse to reserves falling below $$1$ billion in the next year.

Woodside is targeting capital expenditure in the next year of uS$$5$ billion. The board is relying on

cash flows to fund this expenditure.

Examine the assignment data file which you may download from the RMM iLearn site $($under

Assessment Tasks$).$ Here you will find monthly price data for both oil and the AUD$/$USD$.$ Log

returns have been calculated for you. Using all the available data, complete the following table:

$4$ marks

Correlation is changing over time so you decide to investigate this using overlapping samples where each

calculation uses $12$ months of returns. For example you first calculate the correlation between oil and AUD

returns as at end May $1988$ using the most recent $12$ returns up to and including the May $1988$ observation.

You then recalculate as at end June $1988$ in the cell beneath, using just $12$ return observations, and so on$.$

Produce a graph showing how correlation changes over time. $3$ marks

Since volatility is also changing over time, you perform a similar analysis with overlapping samples for

volatility $($each having $12$ observations and expressed as standard deviation per annum$)$ for the returns of

oil and the returns of AUD$/$USD$.$ Present both series in the same graph.

$3$ marks

Simulate $1000$ paths of monthly prices for the next $12$ months for oil in USD and the AUD$/$USD aSsuming

that:

the mean of log returns for both series is zero,

the volatility of the oil returns is $10\mathrm{.}0\%$ per month,

the volatility of the AUD$/$USD returns is $3\mathrm{.}0\%$ per month, and

the two series have a correlation of $0\mathrm{.}20.$

starting point for the price and AUD $($month zero$)$ should be the values as at end August

Produce two histograms $($one for oil and the other for AUD, both expressed in terms of USD$)$ showing the

distribution of prices at the end of $12$ months. Hint: there is a Histogram tool in the free Data Analysis Add$-$

in

Briefly comment on the shape of the histograms and why they take this shape.

$5$ marks

For each path, calculate the earnings $($i$.$e$.$ gross profit $=$ revenues less cost of sales$)$ over the next $12$

months $($no need to adjust for time value$).$

Now analyse the distribution of earnings and cash holdings across all the simulated paths using appropriate

risk measures.

Also present any additional analyses that you conduct with different assumptions, justifying the

assumptions you have made.

Repeat the analysis in $5,$ this time assuming that the selling price of $50\%$ of the anticipated production is

fixed at IISD $77\mathrm{.}00$ per harrel. Rriefly comment on how this hedge changes the risk and the most likely

outcome.