Australia | May 29 2017
Woodside Petroleum has outlined its plans for both the short and long-term, assuring investors it will retain a commitment to the 80% pay-out ratio.
-Key issue for dividend payment is maintenance of US$55-60/bbl oil price, or above
-Tolling and development of Browse could add significant value to the stock
-Main negatives appear to involve Scarborough, Myanmar and Kitimat
By Eva Brocklehurst
Woodside Petroleum ((WPL)) has provided further clarity on its plans for both the short and long-term, briefing brokers on its priorities and assuring investors it will retain its commitment to an 80% pay-out ratio.
Citi does not believe one single asset will make or break the outlook and the company has carefully crafted a portfolio of options, while the balance sheet is robust. The company's cash flow forecast suggests to the broker that a decision regarding the balance between delays to growth or curtailing the pay-out ratio only needs to be made if oil is sustained under US$55/bbl.
Credit Suisse is more sceptical and conducts a deep dive into the numbers on Browse, believing free cash flow yield is set to be just 4.1% on guidance of US$65/bbl for oil in 2018. At US$60/bbl the yield drops to 2.2%, a level where the dividend would unable to be funded in FY19, in the broker's view.
Taking a conservative view on oil, Credit Suisse believes balance-sheet measures have to be considered, and the question is about whether equity will be needed to support the level of development spending required or whether the dividend needs to be reduced.
Ord Minnett found the briefing more optimistic than in 2016. The positives emanate from Browse as well as the Pluto expansion. The broker believes the market continues to undervalue the growth options for the company, and emphasises the key point of the briefing was financial discipline, with management indicating all projects would be paid for internally and the dividend would be maintained.
Valuation
Citi continues to believe the stock is a defensive name in the oil & gas space, given prudent management, strong balance sheet and attractive dividend. That said, the broker estimates the stock reflects a US$70/bbl oil price or, alternatively, on an un-risked basis, is already pricing in all growth from Horizon 1 and more than half of Horizon 2. Hence, the broker retains a Neutral rating.
Low risk growth and the company's commitment to an 80% pay-out ratio for more than 10 years underpins a Buy rating for UBS. The broker forecasts production to reach 103mmboe in 2020 and a recovery in oil prices over the next few years, assisted by the OPEC decision to reduce output. The broker envisages oil markets in deficit from the June quarter 2017 and Brent to average US$65/bbl in 2018 and US$70/bbl from 2019.
Yet, Morgan Stanley flags increasing concerns that OPEC may not extend production cuts next year. Moreover, US shale is growing faster than previously thought and oil demand is slightly weaker. The broker maintains Woodside as its number one in the order of preference for large oil stocks and believes oil prices at current levels are sufficient to underpin development of Senegal.
Also, free cash flow is set to increase as production in rises over the next few years. Morgan Stanley expects Senegal and brownfield LNG expansion to drive the share price over the next 12 months.
Horizons
The company outlined three stages, called Horizons, for future opportunities. The first stage, 1-5 years, is about generating cash in the near term, maintaining an 80% pay-out ratio for the dividend and cumulative free cash flow of over US$4.5bn, under a US$65/bbl price scenario for Brent from 2018. This includes Wheatstone, Pluto and Senegal.
The expansion of Pluto appears likely and should be achieved by 2021 through the development of a stand-alone system. With spare capacity on the North West Shelf expected to be available in 2021 the joint venture is expected to install a fixed tolling regime on resource owners in the region. The company is targeting a final investment decision on Senegal in 2019 and first gas by 2021, although Citi notes possible arbitration may mean uncertainty overhangs the development.
Macquarie expects the proposed NWS tolling and the Pluto expansion projects will lift production in the 2020s, but more work needs to be done. The broker remains cautious about the third-party tolling because of the need for unanimous consent among the joint-venture partners. The most promising acreage, in the broker's opinion, appears to be Senegal.
Horizon 2 encompasses the Browse, Scarborough and Myanmar developments, with Browse at the forefront. Horizon 3 involves long-term planning after 2027 (Kitimat, Sunrise and further exploration). Macquarie observes exploration remain static until 2019, as Nova Scotia has been written off and Myanmar, while promising, is years away from realisation.
The broker divides the information into good and bad news. On the bad news front, the Scarborough development appears to be on the back burner. The broker believes joint-venture partners are lacking motivation, particularly operator Exxon Mobil and, thus, the prospect of an additional train at Pluto is unlikely.
The broker is also cautious about Senegal, particularly regarding timing of the development. On a more positive note, the company appears adamant that the NWS joint venture will agree to a toll for other gas developers sooner rather than later. Macquarie believes that the combined benefit of tolling and the development of Browse could add around $0.90 per share to the core valuation for the stock.
The main negatives Ord Minnett found were regarding Scarborough, Myanmar and Kitimat. While, understandably, Kitimat is long dated the broker had expected more prospectivity from the other two and these projects now look like they could take longer to develop.
Myanmar still needs more drilling to determine whether it will be tied back to existing infrastructure or built as a stand-alone project. Scarborough needs technical advances to achieve the company's preferred option, which is to tie back to the Burrup Peninsula.
Deutsche Bank believes the most significant challenge for the company is to make the market believe that Browse can be monetised in the next five years, after the many setbacks. The broker believes there are still questions about the commercial viability of the current Browse proposal and has not changed its current valuation assessment, retaining a Hold rating on the stock.
Nevertheless, if the company can demonstrate the commercial viability of the Browse backfill proposal, the value created could be worth an additional $2 per share to the broker's valuation.
The main milestone to be achieved is the tolling agreement. In addition, Browse volumes will need to be marketed in a market that currently appears well supplied. Deutsche Bank questions whether the backfill can become sufficiently cost competitive to secure LNG offtake deals. Deutsche Bank continues to believe Scarborough is a long dated option and most likely as backfill for Pluto LNG post 2030.
There are three Buy ratings, four Hold and one Sell (Credit Suisse) on FNArena's database. The consensus target is $32.45, suggesting -1.2% in downside to the last share price. Targets range from $26.80 (Credit Suisse) to $37.40 (UBS).
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