Woodside drives out of the boom with a full tank

When Peter Coleman was appointed chief executive of Woodside Petroleum in 2011 it was apparent that a new era for the group had begun.

After the frenetic, expansionary seven-year period of his predecessor, Don Voelte, Coleman brought a more conservative, more measured and more capital-focused approach to the group.

Both men were, with hindsight, appropriate for their times. Voelte’s dash for growth, while not without its issues – the Pluto project now powering Woodside’s cash flows was well over budget and time – came in that initial phase of the LNG dimension to the broader resources boom.

Coleman’s more conservative style was imposed before Woodside could get too caught up in the massive cost escalations that have afflicted the resources sector generally and the LNG sector in particular as they competed for the resources needed to build their projects.

The de-risking of Woodside’s exposure to the Browse project through the $US2 billion sell-down of its interests to Mitsui and Mitsubishi was a case in point, as was the decision to resist the pressure from the WA government and walk away from the controversial $US45 billion-plus proposed onshore LNG facility for Browse at James Price Point. That decision was further validated by this week’s West Australian Supreme Court finding that the environmental approvals for the proposed gas processing hub were unlawful.

Today Woodside reported record revenue and earnings, with earnings rising 7.5 per cent to $US873 million in the June half. More impressive, however, is the group’s underlying financial position. It halved its gearing to 26.4 per cent and built up its cash reserves from $611 million to $US1.8 billion. It generated $US1.5 billion of cash flow.

Where commodity producers are struggling to reconcile shareholder demands for bigger cash returns with their plummeting profitability, Woodside has previously announced a $520 million special dividend and an increase in its payout ratio to 80 per cent of its underlying net profits. As it pays its dividends in US dollars, Australian shareholders will get an extra boost from the depreciation of the Australian dollar.

Those increased cash returns to shareholders have been made possible by a tapering of the group’s capital expenditures. Woodside invested only $US500 million in the half and has cut its previous guidance for full-year investment spending by $US300 million to $US2.3 billion.

The withdrawal of the James Price Point option for developing Browse has created something of a hiatus in the Woodside development pipeline which underwrites those increased returns for shareholders in the near term, although Woodside has now embraced Shell’s floating LNG platform technology for the project, saying it will recommend it as the concept for commercialising the three Browse gas fields.

The FLNG technology, while resisted by the Western Australia government which wants the bulk of the spending onshore, should enable cheaper, faster and lower-risk development of the project, with Woodside targeting a final investment decision by mid-2015.

While the surge in returns to shareholders might suggest Woodside has reached some level of maturity, it does have a range of potential expansion projects within its existing portfolio and has also expanded its international exploration program.

Within the $US2.3 billion of investment spending this year is an estimated $US1.1 billion for the Leviathan LNG project in Israel, although the group’s 30 per cent interest in the project, which Coleman has described as a "once-in-a-decade" opportunity, has not yet been finalised.

Woodside’s expansion internationally – it also has exploration interests in Myanmar and off Ireland – is a deliberate strategy to exploit its skill base and diversify its exposure to what is now a very high cost domestic environment.

While the group has lowered its production guidance for this year from a range of 88-94 MMboe to between 85-89 MMboe because of an unplanned shutdown of the Pluto LNG processing train and a scheduled refurbishment of its Vincent floating production storage vessel that is taking longer than expected, Woodside is confident about its position and outlook, as well as the outlook for LNG prices.

In a resources sector plagued by high costs, lower prices and considerable uncertainty, the group is in a very strong position, with lots of future growth options and the balance sheet to exercise them.