Shelving of Browse project means more cash at Woodside

Woodside's decision to shelve plans for a $40 billion-plus development of the Browse Basin centred on an onshore LNG production at James Price Point in north Western Australia highlights the financial pressure on new resource projects in Australia, but may deliver windfall returns for the group's shareholders.

Cost pressures that developed during the resources boom have been compounded by the stubborn strength of the Australian dollar, and Woodside's decision was not a surprise.

The group's Pluto LNG project came on stream a year ago with a $15 billion build cost that was $3 billion higher than originally expected, and West Australian LNG projects and Queensland coal seam LNG projects have typically been reporting cost blowouts.

Browse's prospects were further complicated by environmental protests, and changes in the ownership of the joint venture last year signalled that development plans were fluid. BHP Billiton sold a 10 per cent stake in the project to PetroChina last December, Woodside announced in May that it would cut its stake to 31 per cent by selling 14.7 per cent to Mitsubishi and Mitsui of Japan, and Shell acquired Chevron's 16.7 per cent stake last August, boosting its interest to 27 per cent.

An offshore platform processing alternative that Shell favours is the likely new development option for Browse, but the project will be a few years late at least, taking more heat out of Australia's resources sector investment pipeline, and putting more pressure on the non-resources sector to fill the gap.

Woodside's shares actually rose by more than 3 per cent on Friday, however, because delaying Browse transforms the group's medium-term cash flow outlook, and produces interesting capital management options.

Woodside boosted underlying earnings by 24.5 per cent to $2.06 billion last year, and boosted operating cash flow by 55 per cent to $3.48 billion as its Pluto project kicked in. The group produced 84.9 million barrels of oil equivalent during the year, and Pluto's contribution was 24 million barrels.

Woodside's free cash flow is heavily influenced by whether it is investing in giant projects such as Pluto and Browse, or banking the cash they generate when they are up and running. Free cash flow was negative at $668 million in 2008, $3225 million in 2009, $837 million in 2010 and $1291 million in 2011 as Pluto was being developed. It would have been negative by a combined $5 billion or so in 2015 and 2016 if Browse had been developed as planned, but with Browse delayed and Pluto producing, Woodside might now be cash flow positive by a similar amount in those years.

The question would then be what Woodside might do with its unexpected avalanche of cash as it sifted through its options for Browse. A selective buyback that sought to lower Shell's 24 per cent stake in Woodside would be one option, but the group could also opt for a general share buyback, or special dividends.

Woodside is aware of the possibilities. Chief financial officer Lawrie Tremaine said in February that the group was not under pressure to sanction projects, and would be in a "great position" to return cash to shareholders if projects were delayed. Chief executive Peter Coleman seconded that on Friday after the Browse announcement, saying that if growth opportunities developed more slowly than expected, Woodside could "consider additional measures to accelerate the return to investors".

The NSW government's $5.1 billion sale of 99-year leases on Port Botany and Port Kembla to a consortium of investment funds led by Industry Funds Management (80 per cent) and the Abu Dhabi Investment Authority (20 per cent) caps a spirited auction that says a lot about how foreign investors view this country.

NSW Treasurer Mike Baird probably would have been pleased to top the $3 billion mark when he kicked the sale process into gear last year. In the end NSW Treasury and its advisers, including Morgan Stanley, PricewaterhouseCoopers and Minter Ellison fielded three competing bids - from the winning consortium, from another that included Queensland Investment Corporation, the Future Fund and Canadian Pension Plan, and from a third consortium that included Ontario Teachers' Pension Plan, Ontario Municipal Employees Retirement System offshoot Borealis Infrastructure, and Australia's Hastings Funds Management. The winning bid is estimated to be a stunning 25 times earnings before interest, tax, depreciation and amortisation, which should put paid to any suggestions that NSW has sold one of its commercial crown jewels for a pittance.

The auction was smoothly conducted by NSW Treasury and Morgan Stanley, and the bidders knew that they probably had only one chance to own the ports, given the list of potential buyers: they were all looking to own the ports long-term, not hold them for a while and then flip them back out in a float or trade sale. They were also targeting long-term assets in an economy that does not have the problems the northern hemisphere economies still face in the wake of the global crisis.

Baird ran the sale at the right time, and has significantly eased the budget pressure on the NSW government in a single stroke.

UBS and Lazard provided financial advice to the winning consortium, with Herbert Smith Freehills handling the legals.

mmaiden@fairfaxmedia.com.au