LNG prices typically lag the oil price so Woodside Petroleum’s interim profit, which halved to US$340m, wasn’t a surprise. Despite the profit fall, this was a fine result, highlighted by stunning financial returns from the long maligned Pluto LNG project.
We have long been critical of Woodside for taking almost 100% equity in Pluto and are on record as saying that it will generate a tiny return on capital. Woodside seems intent on disproving that thesis, delivering excellent results from Pluto and from the ageing North West Shelf LNG project.
Pluto’s production was 14% higher than expected at 4.9m tonnes per annum (mtpa) which, along with cost cuts, delivered the best cost outcome in years: Woodside’s unit cash costs were just US$5.20 a barrel, 38% lower than the prior period.
Result affected by lower oil prices
Excellent cost control
Some new project investment
Of course, LNG projects attract huge depreciation and amortisation charges so the total cost is far higher but it does demonstrate that Woodside can match more distressed peers in cost cutting.
Pluto now generates more operating profit (after depreciation but before tax) than the mighty North West Shelf and, although it cost too much to build, the project has performed well. The North West Shelf will require additional gas within five years so higher exploration charges or gas supply agreements are likely.
We have concerns about LNG pricing, specifically persistently lower LNG pricing, in the years ahead. Yet with a fine balance sheet, strong operating cash flow and competitive costs, Woodside will fare better than most in a downturn.
A major gripe has long been the slow bleeding decline in output as the business exhausts growth options. Those concerns are easing. Production rose 9% in the half-year and Woodside increased output targets for the year to 90m-95m barrels of oil equivalent.
|Year to June (US$m)||2016||2015|| /(–)
|EPS (US cents)||41||82.5||-50|
|DPS (US cents)||34||66||-48|
Wheatstone, a giant LNG project offshore Western Australia, should commence late 2017 and Woodside has made large gas discoveries in Myanmar and new acquisitions off the African coast that could add to output over time.
We remain bearish on Browse and Sunrise, the much touted Australian LNG projects that don’t appear commercial but there does seem scope to add gas to existing LNG facilities.
Following a period of soft investment, Woodside is again spending: it will spend about US$2bn this year and next, mostly on Wheatstone. The balance sheet remains a marvel. Despite lower prices, Woodside carries just US$4.2bn of net debt against an equity base of over US$15bn. There is still plenty of scope to invest while prices remain low.
We’re upgrading our buy price to reflect lower debt levels but, with the stock up 8% since Is it time to buy oil stocks Pt 2 on 14 Jun 16 (Hold – $27.00), Woodside remains a HOLD.