Woodside Petroleum Ltd (WPLAU) is in the news through a deal with BHP to gain control over significant fossil gas production. The company has underperformed the Australian stock market significantly on this, which adds to a longer period of marked equity underperformance.
Credit, however, has remained remarkably firm, with both bonds as well as CDS trading in tandem with broader indices. The historical cross-asset class experience is that prolonged equity underperformance tends to lead credit underperformance.
Fundamentally, we view WPLAU’s execution risk on the deal as significant, bearing in mind the track-record of the WPLAU management almost halving the share price of the company since the peak in 2018. We also see a non-zero probability for the stranding of the legacy BHP assets, with associated financial drag.
These two factors have the potential to decrease the creditworthiness of WPLAU relative to the broader Australian market.