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rollacoaster

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18/08/21

09:05

Post #: 55372799
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Originally posted by SilentPartnr ↑

In my opinion, the trouble with WPL over the last 10 to 15 years is that it has been getting a low % return on total assets which has in turn led to low % return on equity.

For example, using ME's research reports, Return on assets has been and is projected to be :

2020 - 2.6%; 2021 - 9.2%; 2022 - 6.3% and 2023 - 8.3%

Leading to Return on equity of:

2020 - 3.1%, 2021 - 11.7%, 2022 - 7.5% and 2023 - 8.4%

When you pay out dividends of yield 2020 - 2.4%, 2021 - 5.8%, 2022 - 3.6% and 2023 - 3.7%

It doesn't leave much in the way for growth. the NWS has been in operation for 30 years and Pluto for nearly 10 years. If you look at the valuation of currently producing assets, there are only 2 additional assets producing : Greater Enfield (valuation US$554M and Wheatstone US$3,637;

Scarborough is "The expected internal rate of return (IRR) of the integrated Scarborough and Pluto Train 2 development is greater than 12%. It has a globally competitive cost of supply of approximately $6.8/MMBtu to north Asia and is targeted to deliver the first cargo in 2026 into a market with anticipated robust demand for LNG."

An IRR of 12% is not all that great. Once developed it should still warrant a valuation greater than predicted cost of construction as these assets tend to be valued using lower % returns. However, Scarborough is not expected to come online until 2026, 5byears from now. I am sure it is this expected low rate of return is the reason BHP wants out of Scarborough one way or the other.

My view it should still be developed, but hopefully with greater use of project finance, at least upm until 2025. WPL does not want to put too much of its own capital into a project that will not be producing a return until more than 12 months away.

The recent announcement by BHP on the Shenzi North project : " The project offers very attractive returns at a nominal IRR of over 35 per cent, a breakeven of approximately US$25/bbl and a payback of less than 2 years." shows some of the returns BHP were looking for. With that size IRR and payback period, it can generate a lot of finance capability for further future projects.

Sangomar is expected to have a IRR of 33% with breakeven oil price of US$30/bbl. Based on project cash flows this is expected to have a payback period of about 3 years. Hopefully, WPL will not be looking to offload a large chunk of this project unless it gets a good price. With a payback period of about 3 years, you recover half your investment in the first 18 months.

Hopefully, this merger will create greater opportunities for WPL to invest in higher risk/ higher IRR projects and make greater use of project finance on new developments. I think this will be the main benefit from this merger.

Regards

SP

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Spot on

There is now twice as much competition for capital at WPL, which wil allow them to make choices and pick the best.
Up until last week all we had was Scarborough and Senegal. Now we have a shopping list

WPL Price at posting: $20.73 Sentiment: Buy Disclosure: Held
4 Upvote

0 Great analysis

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