Australia | Feb 10 2014
-Most think new deal reasonable
-Macquarie has some doubts
-Options still on Woodside's table
By Eva Brocklehurst?
Woodside Petroleum ((WPL)) has ruffled a few feathers among brokers, after a long wait announcing a new Memorandum of Understanding (MoU) on the Leviathan project in Israel. The company will now farm into a 25% interest, reduced from 30%, and pay US$1.2 billion in near-term payments against the US$1.08bn considered under the original agreement. The increased price and reduced interest roughly equate to the 12% increase in the resource size that has occurred since the original deal was struck.
UBS has faith in the fact that, as Woodside was willing to pay a higher price for a smaller stake, it must mean the transaction is still value accretive. With non-LNG export via a pipeline looking probable, UBS notes this may push the LNG priority down the list, but it's still there in the mix. The broker thinks the company's dividend policy to pay out 80% of underlying net profit provides downside protection and oil price exposure to those investors seeking value. Admittedly, some investors were probably hoping this transaction would not eventuate and leave money for a capital return. UBS suspects this option is now off the table.
The broker considers the ultimate value of Leviathan will be dependent on a number of variables that will take some time to unfold. Of note is the fact the company has no material growth asset in the construction phase at present and so can easily pay out 80%. UBS thinks this policy will support the share price until the next phase of growth is identified. Furthermore, retaining such a policy commitment could be interpreted as that growth phase being some way off, other than via Leviathan.
The company has been dragged into this deal. That's how Macquarie sees it. Moreover, the fact that it's an MoU rather than a done deal means the terms could still deteriorate. The company appears to be paying more but getting less, although the broker acknowledges the revised terms may not be as bad as some quarters have claimed. This is only one aspect of Macquarie's Underperform call. Other inputs include the prospect of a sell-down of Shell's stake and overly optimistic assumptions regarding Pluto LNG repricing.
Back to Leviathan. Macquarie finds there's little that resembles the original deal. The cost of entry has gone up, LNG is moving down the list of developments, Israeli export quotas are more restrictive and final terms are uncertain. The broker is inclined to the believe that the company needed this deal, regardless of price. A Leviathan development would enable Woodside to book as much in 2P reserves as it has booked in aggregate over the last seven years.
Morgan Stanley doesn't have a problem with the revised price. It's a world-scale resource in a region short of energy. Also, the broker does not expect this acquisition to affect dividends. Debt levels are low and capital can still be re-deployed into asset deals. On this measure, the initial Leviathan payment of US$850m reduces the purse to US$2.7bn. JP Morgan also thinks the revision is acceptable, given the steps the Leviathan JV has made towards contracting gas to nearby countries such as Jordan and Turkey. Then there's the increased resource base. The broker thinks the stock is solid value on an absolute return basis.
The key risks for JP Morgan, which the broker thinks are overestimated by the market, are the share overhang from Shell and the reinvestment risk. The broker suspects Shell is comfortable with current management at Woodside and doesn't find any immediate reason to sell. In terms of reinvestment risk, this centres on the fear that, as the company faces strong competition for upstream assets, there is a risk it will overpay. JP Morgan thinks this is overplayed, as the company seems keen to pursue less lumpy opportunities. Such an attitude, in the broker's view, enables dividend policy to be maintained while reserving the potential for substantial equity commitments.
Leviathan's estimated resource size has risen to 18.9tcf from 17tcf over the last year and the farm-in should be seen in context, in Citi's opinion. The broker calculates Woodside farmed out a 14.7% interest in the Browse resource for US88c/mcf, significantly higher than this proposed farm-in of Leviathan, at US28c/mcf. Leviathan is a domestic gas supply project for Israel as well as an LNG export project. Citi has not relied on Leviathan for an investment thesis and therefore, if the deal goes ahead, it provides a further growth option and upside to the risked valuation. Citi thinks there's potential for the company to maintain the pay-out ratio and develop both Browse and Leviathan.
The stock has two Buy ratings, two Hold and three Sell on the FNArena database. The consensus target is $38.82, suggesting 2.7% upside to the last share price. Price targets range from $35.00 to $43.01. The dividend yield on 2013 estimates is 7.3% and 2014 is 6.8%.
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