Woodside Petroleum

Woodside Petroleum’s third quarter results showcased the production success of the company’s new Pluto project. Pluto, which earned the inglorious title as the world’s most expensive LNG project, helped lift output 65% from the previous year to 26.5m barrels of oil equivalent (mmboe), generating revenue of US$1.8bn. As a result of flawless early performance, the company increased its production target for the year from 77-83mmboe to 83-86mmboe.

Woodside also announced the completion of a US$2bn sell down of its stake in the Browse LNG development to a Japanese consortium. The company will book a US$974m profit on the deal, an excellent outcome from a project that seems unlikely to be developed this decade.

That cash and strong cashflows from its enlarged operations will be used to pay down debt, which blew out to US$5bn after costs escalations at Pluto, and to fund new ventures. Woodside has identified several regions for growth, including offshore Israel, where large new gas discoveries have been made, and Myanmar, where Woodside has purchased exploration blocks.

Woodside appears to be abandoning the insistence on developing the Browse and Sunrise gas fields. That’s a good thing. High costs in Australia are driving down returns across the industry. We’ve long maintained that returns on capital from Pluto, for example, will be close to zero. That’s bad news for existing shareholders but new shareholders can still make money from Woodside if bought cheap enough. We’re due to take a closer inspection of the business to make that call. Woodside’s share price has increased marginally since 22 Aug 12 (Hold – $34.90) and, for now, we’re sticking with HOLD.