MARKETS SPECTATOR: Knocking Woodside

Macquarie has downgraded Woodside, citing the large amount of resource rent tax credits boosting its earnings result as well as doubts over its growth pipeline.

Macquarie Group has this morning downgraded Woodside Petroleum (WPL) to underperform from neutral after it reported results that were in line with the broker’s forecasts.
Macquarie commented that it thought the result was messy as it was flattered by approximately $120 million in Petroleum Resource Rent Tax credits stemming from ongoing augmentation of the Pluto LNG project.

The company has a clear bias for growth of yield but the growth story seems to be running out of steam.

"Highlighting 20 potential growth options (which in aggregate would cost over $US60 billion) seemingly confirms management’s growth bias over dividends. However, with management stressing that it won’t sit on cash if this growth is delayed, future distributions cannot be ruled out given the risks around Browse, Sunrise and Leviathan. But with management framing any such dividend as a conciliation prize for growth deferral and with Woodside trading above core net asset value, and therefore needing progress on its growth options to justify the share price,” the broker said.

Macquarie also notes the allocated capex of $225 million to the Leviathan project while nothing was set for the Browse project, which in its opinion speaks volumes about the relative merit order of Woodside’s growth pipeline.

Following management's lengthy discussion about the LNG market outlook, Macquarie is convinced this is where their focus is for future growth, yet it does not share the confidence in the outlook given the huge increase in supply side competition.

Given the above reasons, Macquarie downgraded the stock to reflect the recent share price strength coupled with limited near-term catalysts and dwindling macro support. Consequently, it sees Woodside at the top-end of its trading range and believes it will struggle until there is further clarity regarding the disposal of Shell's 24 per cent stake.

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