Is Time Slipping Away For Woodside?

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A sharp downturn in June quarter production and revenue, while perhaps one-off, has caused brokers to question whether Woodside Petroleum's timeline on growth projects is slipping.

-Questions being raised about LNG expansion given weaker market conditions
-No formal agreement on the North West Shelf toll with Browse
-Uncertainty stemming from timing, tax regimes and carbon policy
 

By Eva Brocklehurst

Weak production and quarterly revenue that was at its lowest level since early 2010 caused brokers to take a second look at the timeline for Woodside Petroleum's ((WPL)) projects. An extended turnaround at the Pluto LNG facility meant production and sales volumes declined -20% and weak LNG prices also added to a -40% drop in revenue in the June quarter.

Production growth is to be phased over the next few years with key projects in Senegal, expected in 2022, Scarborough, expected in 2023, and Browse, expected in 2026. All are yet to reach a final investment decision (FID). Woodside Petroleum is the operator and should ensure the timetable is followed, but brokers are noting some slippage as certain requirements for proceeding are outside the company's control.

Woodside has not changed full-year guidance, having already indicated that 2019 production would be at the low end of its 88-94 mmboe guidance range. There was no update to the LNG expansion timing but questions are starting to be raised, given weaker conditions and the challenges of aligning the joint-venture partners.

Production at Greater Enfield is drawing closer, although Morgan Stanley assesses this is the biggest risks to forecasts for 2019, as start-up had been assumed from mid 2019. The broker had downgraded the stock early in the year to Equal-weight as risks appeared to be developing regarding the long-term growth plans.

Weak LNG Markets

Since then, weak spot LNG markets, which are well below break-even, limited offtake agreements at Scarborough, with FID looming for 2020, and no formal agreement on the North West Shelf toll, are all starting to bite.

There is also uncertainty in regard to the alignment between BHP Group ((BHP)) and Woodside as to how Scarborough should be developed, either via Pluto train 2 or the North West Shelf. Until some of the factors affecting the outlook are resolved, Morgan Stanley considers it unlikely the stock will outperform peers.

Credit Suisse believes the negatives implied by the June quarter results were largely one-off and over-emphasised by the market. The broker also suggests any upside from Scarborough and the Pluto interconnector are not been valued appropriately.

Credit Suisse was already more conservative regarding costs versus consensus, so was less surprised by higher production costs in the quarter, suspecting this may have been one of the drivers of the negative market reaction. The broker assumes the production cost increases are because of one-off items such as the downtime at Pluto and, therefore, are not recurring, although acknowledges guidance is being sought from the company to clarify this point.

Citi acknowledges turnaround costs at Pluto are the obvious culprit in the June quarter weakness but also suspects North West Shelf contract re-pricing is not being accounted for by the market. The broker also notes the Pluto interconnector has been delayed to 2022 from 2021 because of works downstream, and the dry hole in Bulgaria raises questions about whether higher exploration expenditure is warranted.

The broker believes the market will need to wait for the segment results in August to understand the degree to which the miss to expectations in the June quarter is one-off, but suspects the greater share of the miss is not a result of maintenance costs at Pluto and forecasts may need to reduce into perpetuity.

Citi also notes the Pluto interconnector is been delayed to 2022 from 2021 because of works in the downstream and the dry hole in Bulgaria raises questions about whether higher exploration expenditure is warranted.

Although the company has strongly performing assets, the stock price is trading above Ord Minnett's valuation, based on base case oil price forecasts. The broker is below consensus estimates for 2019 and 2020 on oil prices and maintains a Lighten rating. Based on tax guidance, Ord Minnett estimates net profit for the first half of US$497-630m, well below prior forecasts of US$741m. This has meant a -16% reduction to the 2019 forecast.

UBS also revises 2019 estimates to be -19% below consensus and expects the consensus view will moderate. This puts forecast dividends at risk, given the company's pay-out ratio approach to dividends. Morgans has calculated, if Woodside maintains its ratio at the top end of guidance for a 50-80% pay-out, then on current commodity forecasts this supports the fully-franked yield of around 6%.

Macquarie had factored in the downtime at Pluto, while sales volumes missed estimates because of the timing of condensate shipments. The broker continues to envisage challenges for the company because of uncertainty over tax regimes and carbon policy and downgrades forecasts by -14% for 2019.

The broker has also increased the Wheatstone depreciation schedule which has had a positive impact on the target. Citi agrees the depreciation schedule has caught some off guard, as this is running well ahead of nameplate.

Senegal

The company is also awaiting a ruling on arbitration with FAR Ltd ((FAR)) regarding the Senegal project. Woodside has stated that a resolution on the arbitration is likely to be in the first half of 2020 at the earliest, although guidance is still targeting a final investment decision at the end of this year.

Citi points out project financiers won't lend while arbitration is ongoing, so the final investment decision target appears unrealistic. UBS also points to this disparity in the timeline, despite the company suggesting the two items are mutually exclusive. However, the broker suspects arbitration will only become an issue if the decision goes against Woodside.

FNArena's database has two Buy ratings, three Hold and two Sell. The consensus target is $34.62, signalling 2.4% upside to the last share price. Targets range from $29.13 (Citi) to $38.04 (Morgans, yet to comment on the quarterly). The dividend yield on 2019 and 2020 forecasts is 4.9% and 5.5% respectively.

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