There’s an interesting line in the Woodside Petroleum presentation of its $US2.75 billion acquisition of a portfolio of oil and gas assets from Apache Corporation of the US today. The acquisition price, it says, is at a discount to sunk costs.
That signals the nature of a deal that answers a number of questions Woodside was facing. With oil and gas prices at five-year lows, Woodside is following a well-trodden counter-cyclical 'straw hats in winter' strategy which, if it has got its timing right, will have a big pay-off in future.
It has taken advantage of Apache’s position, not as a distressed seller but as a forced seller at a time when buyers for big-ticket energy assets are scarce.
Apache has succumbed to pressure from an activist investor, Jana Partners, which has used the leverage of a $US1bn-plus shareholding to pressure the Texas-based group to sell its international assets and focus on its US shale operations. Apache has sold more than $US10bn of international assets bin the past 18 months or so.
From Woodside’s perspective the deal, assuming pre-emptive rights over the assets aren’t exercised, would give it a 20 per cent increase in reserves, immediate cash and earnings from the Balnaves oil field, a 13 per cent interest in the $US29bn Wheatstone LNG project in Western Australia and a 50 per cent interest in the Kitimat LNG project in Canada, including significant exploration acreage.
While the jewel within the portfolio might be the Wheatstone interest, which will give it exposure to a half-completed 8.9 Mtpa two-train LNG project which has 80 per cent of its volumes contracted, the inclusion of a 65 per cent interest in the Balnaves field, which began producing light oil in August, gives it immediate cash flow.
The overall transaction, Woodside says, will be immediately profit, earnings per share and cash-flow accretive.
The deal also addresses an issue that has been a particular focus of investors since it became clear that Woodside was facing a growth hiatus as a result of the costs issues associated with its controversial Browse LNG project.
Woodside abandoned the original concept of an onshore development for Browse gas (inciting the wrath of WA Premier Colin Barnett in the process) and has been analysing floating LNG technology as an alternative development option.
Today it announced a revised schedule for a final investment decision on that option, saying the current market conditions gave it an opportunity to significantly lower cost outcomes as the impact of the precipitous fall in oil prices begins to flow through the industry’s supply chain. In effect, it is delaying a decision on whether to proceed with the project.
Woodside’s Plan A to fill in the gap in its growth pipeline had been to buy into the massive Leviathan gas project off Israel, but continued reworking of that $US2.7bn deal and the development plan for the gas field saw it walk away earlier this year.
Plan B was to buy back $US2.7bn of Shell’s residual shareholding in Woodside, reducing it to a non-strategic level of less than 5 per cent, but that was narrowly rejected by shareholders. The buyback would have leverage the Woodside balance sheet and its performance statistics.
Woodside’s 'problem' is that despite a payout ratio of about 80 per cent and special dividends, it is generating massive cash flows. It has a balance sheet with net debt of only about $US600 million -- a gearing ratio of less than 4 per cent.
The Apache transactions help address the balance sheet issue -- it will be funded by existing cash and debt and add modest leverage to the group’s financial profile -- as well as the gap in its growth profile. Wheatstone is expected to produce its first gas in late 2016.
There is a longer-term growth option within the assets acquired. The Kitimat LNG project in British Colombia is regarded as the most developed of Canada’s LNG prospects, although the remoteness of the project and therefore the high prospective development costs mean it is something of a longer-term option play than a certainty to proceed.
There are closing to 20 LNG projects on the drawing boards in Canada, but the collapse in oil prices has seen the development plans for most of them either slowed or frozen.
Woodside’s share price fell on the news of the deal, although that could also be attributed to the still-sliding oil price. Assuming completion of the acquisition, investors' hopes for more big capital management programs from Woodside might have taken a knock today given that, with the $US2.7 billion acquisition cost will come significant new ongoing spending commitments.