Woodside Offers Potential, And Potential Delays

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Scarborough appears to be progressing but there was no update in the December quarter report regarding a gas agreement for Browse. Hence, delays feature in broker assessments of the outlook for Woodside Petroleum.

-2018 capital raising likely finances Scarborough, but not Browse
-Capital expenditure in 2020 revised up sharply
-Some brokers are asking whether Woodside still offers value

By Eva Brocklehurst

Delays feature highly in broker assessments of the outlook for Woodside Petroleum ((WPL)) after a December quarter production report that was generally regarded as solid. There were no major updates on growth milestones such as tolling agreements and it could be some months before Scarborough and Browse bear fruit.

Production and sales were higher than many expected in the quarter while 2020 production guidance implies growth of 12%, driven by higher LNG volumes and increased oil output from Greater Enfield.

Final approvals have been reached for Sangomar phase 1 and this Senegalese project will move into execution and development. Woodside is targeting first production in 2023 from 23 sub-sea wells tied back to an FPSO that can produce at 100,000 bbl/day.

Meanwhile, Scarborough appears to be progressing. Credit Suisse considers the upside for Scarborough and Interconnector growth, as well as possible premium group pricing, more than offset risks posed by weak LNG spot prices.

There was no update on the gas agreement between Browse and North West Shelf. Browse was meant to be ready for FEED (front end engineering and design) by the end of 2019 but this required a binding agreement to be finalised, suggesting there is some slippage in the timeline.

UBS flags a cautious approach regarding cost over-runs and a soft LNG pricing environment as well as downside risk from delays across a number of other projects coming on line in the next few years.

Macquarie agrees there are challenges in the medium term, given the potential for further delays at North West Shelf/Pluto, while Morgan Stanley envisages any clear progress at Browse over coming months could enhance the stock.

Woodside remains the preference in the sector because it offers good value and strong production but Ord Minnett acknowledges the largest risk is the funding of growth. The 2018 capital raising possibly provided enough finance to the end of the Scarborough project, the broker points out, but not for Browse.

Capital Expenditure

2019 capital expenditure was -20% below guidance, with the difference expected to shift into 2020. Woodside has guided to capital expenditure of US$4.1-4.4bn for 2020, which includes a US$450m contingent payment to ExxonMobil and BHP Group ((BHP)) for successful FID (final investment decision) at Scarborough.

Morgan Stanley notes there is potential for Woodside to farm down its interest in Scarborough over 2020, from 75%, which would lower payments. The broker points out, typically, E&P companies do not perform well during periods of higher expenditure. This may turn out a little differently for Woodside as, if a large proportion of shareholders continue to take up the dividend reinvestment program this will buffer cash flow.

Credit Suisse, too, suspects expenditure will end up being lower because of a delay at Scarborough. Furthermore, the broker assesses the balance sheet is comfortable, even without any sell-down of interests.

Credit Rating

On the other hand, Citi continues to highlight the risk of an equity raising in 2020 and assesses Woodside is racing against the clock to sell assets and protect its credit metrics.

Ratings agencies will use prevailing working interest to calculate capital expenditure forecasts and the company had stated at its strategy briefing that it would not sell down assets unless at full value.

The broker doubts Woodside would want to be downgraded, although a downgrade to the credit rating could be tolerated. Either an equity raising, or the potential of disappointment on value, appears to be the tough choice for management going forward.

The broker calculates a -US$2.5bn funding shortfall, if no assets are sold and the credit rating agency continues to use a US$55/bbl oil deck. (Woodside's planning assumption is US$65/bbl). While a credit rating agency can look through 1-2 years of weakness, Citi doubts it will look through a protracted capital expenditure phase.

Morgans assesses the share price has gained support in recent months on a recovery in the oil price amid some progress on growth projects. Despite this, the broker continues to envisage value is on offer and estimates a total shareholder return of around 10%. Woodside also boasts the best margin, balance sheet and elevated dividend yield among large-cap peers, in the broker's view.

FNArena's database has three Buy ratings and four Hold. The consensus target is $37.02, suggesting 3.5% upside to the last share price. Targets range from $35.00 (Morgan Stanley, UBS) to $40.50 (Ord Minnett).

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