Woodside: Interim result 2012
Recommendation
The long-awaited start of the Pluto LNG project helped Woodside Petroleum post a 7% increase in production for the half year to 34.2m barrels of oil equivalent (mmboe). Underlying net profit, which excludes one-off items associated with Pluto’s late start, rose 5% to US$865m. From earnings per share of US$1.07, up 2%, a US$0.65 dividend was declared (ex date not yet known).
Half year to 30 June | 2012 | 2011 | Change (%) |
---|---|---|---|
Production (mmboe) | 34.2 | 31.9 | 7 |
Revenue (US$m) | 2,655 | 2,253 | 18 |
Underlying NPAT (US$m) | 865 | 828 | 5 |
EPS (US cents) | 107 | 105 | 2 |
DPS (US cents) | 65 | 55 | 18 |
Franking (%) | 100 | 100 | N/A |
Although Pluto isn't producing at full capacity yet, it still contributed US$300m to revenue, 5mmboe in additional production and US$163m to underlying profit. Yet the project must be judged a dud. Woodside poured $15bn into Pluto. It is unlikely to ever cover the cost of its debt, let alone generate decent returns.
The mistakes Woodside made are now clear; its timetable was overly aggressive, cost assumptions too sanguine and investment returns ignored. Pluto was sanctioned to lift production rather than generate a decent return on capital. It is a project that will scar the reputation of the business for years. As costs piled higher, Woodside relied on project expansion to improve shrinking margins but exploration success has not followed ambitions. Despite spending hundreds of millions of dollars on 25 exploration wells – the largest exploration program in the Carnarvon Basin – Woodside has hung up its drill bit and given up. A second train is unlikely. The only salvation from this point is to process third party gas to lift output and increase returns. That this hasn’t yet happened suggests an agreement isn’t easy.
The other large gas field under the company’s umbrella, Browse, is in a similar bind. With chronic cost escalation, development of this complex oilfield is unlikely. After gloriously riding the oil boom, Woodside has paid the price of over-ambition and is unlikely to repeat the mistakes of Pluto again. Management has learnt the virtues of caution and conservatism or, at least, learnt to mimic them. Having gone through a torturous few years, things may be on the mend. We’ll take a fresh look at the business after reporting season but, with the share price up 6% since 23 Jul 12 (Hold - $32.79), we're sticking with HOLD.