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  Woodside Petroleum chief executive Peter Coleman faces a fight to convince investors of its near-term growth plans. Rob Homer
  by Perry Williams
  Peter Coleman opened Woodside Petroleum's investor day on Friday with a sense of quiet confidence.
  
  He told a packed room of analysts in Sydney that he could sense their "great anticipation" to hear about the growth options for Australia's largest energy company.
  
  "We'll give it a good old crack today and see what we can come up with," Coleman said with a smirk.
  
  Morgan Stanley had partly set the scene the previous day by arguing Woodside's $2 billion cost-cutting strategy had run its course. Instead, Woodside should focus on buying a prized asset at a low point in the oil price cycle rather than focus on an aggressive exploration drilling programme.
  
  http://www.copyright link/content/dam/images/g/p/1/1/7/i/image.imgtype.afrArticleInline.620x0.png/1463901786801.png
  The broker argued Woodside could spend up to $US2 billion ($2.7 billion) on a deal and stay within gearing ratios based on oil at $US40 a barrel.
  

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  While there were no shortage of companies for Coleman to consider buying, one obvious target close to home was the Papua New Guinea-focused gas explorer InterOil. The company ended up making its mark on Woodside's investor day – although possibly not in the way the chief executive would have wanted.

After Woodside's $11.6 billion all-scrip offer for a much tastier PNG play, Oil Search, was rebuffed last September, Coleman and Woodside chairman Michael Chaney quite quickly shifted their focus to the potential of snagging a much cheaper target in PNG, namely InterOil.

Woodside is understood to have run the ruler over InterOil late last year, with some industry talk suggesting Coleman held numerous informal discussions with the explorer, now run by former Woodside executive Michael Hession.

While a potential tilt for InterOil would have been reasonably comfortable, even for the fiscally-conservative Coleman, there may have been concern within its Perth headquarters about just how much gas InterOil could lay claim to, given certification of its Elk-Antelope discovery is not due until the end of 2016.

InterOil's Antelope 7 well could add as much as 2 trillion cubic feet of gas to lift total reserves to 8-9 million cubic feet, paving the way for the Papua LNG project to get over the line.


But some think Hession's claim that Elk-Antelope may be the biggest single discovery in the region since Woodside defined the North-West Shelf resource may prove to be a stretch.

In any case, Woodside's enthusiasm for InterOil appeared to have waned over the past few months, with Coleman noting on Friday that big-ticket deals were off the table and that its preference was at the sub-$1 billion level.

"For us at the moment, big M&A is not front of mind at all, not at all. It has not been for some period of time," he told investors.

Instead, Woodside would focus on hunting out smaller acquisitions of undeveloped fields as it builds up a bank of resources to drive future growth.


Just as Coleman was warming to the task of explaining his vision for production growth, a murmur grew among the assembled crowd.

Just a few blocks from the Woodside investor day, Oil Search boss Peter Botten had a little surprise of his own.

Eight months after rejecting Woodside's takeover approach, Oil Search announced it was merging with InterOilin a $3 billion deal, while also signalling it will offer equity in any new project to customers amid the prolonged downturn in the global gas market.

It was a stunning move, which led to Woodside pausing its investor day and setting up a boardroom for analysts who were scrambling to cover one of the biggest regional gas deals of the past few years.


Coleman said he hoped the reworked schedule would give the crowd time to handle the Oil Search deal "so that we make sure we can focus on the messages from Woodside today".

The Woodside boss famously never gives too much away, but he may have been left to rue whether another target had just slipped from his grasp.

Publicly, at least, it was business as usual.

Coleman said smaller acquisitions would be more value accretive to shareholders than larger deals, with geographic targets including north-west Australia, Myanmar, sub-Saharan Africa, the Atlantic Rim and Canada.


Woodside has been criticised for its lack of near-term production growth opportunities and investors looking for assurances on that front may have been left disappointed by its focus in the next few years of replacing production with developed reserves.

"The company expects growth to come mainly in the next decade through utilising North-West Shelf as a tolling facility, as well as the development of Myanmar, Kitimat and Browse Phase 1," JP Morgan analyst Mark Busuttil said in a note to clients.

With Australia holding a patchy record on executing major oil and gas projects within budget and deadline, Coleman is opting to phase future growth rather than embark on mega projects such as the original concept for Browse LNG.

"By phasing development, smaller-scale projects are able to target higher-value wins by addressing the easiest and most efficient resources first," noted JP Morgan. "Overall risk reduces as gas production occurs at more digestible quantities at a market level, while financially the company can avoid cumulative negative cash flows."

Woodside looked to have impressed the market by cutting costs by more than expected and also got a tick for its upbeat assessment of early gas production in Myanmar, and from the Liard Basin in western Canada longer-term.

Coleman also noted Woodside was continuing to evolve philosophically as a company, with exploration chief Phil Loader continuing to reposition the producer away from more risky frontier drilling and towards emerging targets.

Since Loader took on the role nearly three years ago Woodside has shifted half of its exploration spending on frontier with the balance evenly split between emerging and mature fields. Now 70 per cent of its budget is devoted to emerging basins.

"The difference there is an emerging basin has a proven petroleum system," Coleman explained to investors. "You know it's there, but you're just trying to find it and unlock the door, whereas with frontier you're not even sure you have a petroleum system."


One surprising piece of good news came with Woodside's ability to renegotiate several LNG deals in the market.

Analysts had been warning that Australian energy producers – and Woodside in particular – may face years of lower prices for exports of LNG as buyers in Asia use a supply glut to negotiate better terms on deals.

With LNG markets over-supplied until the end of this decade, analysts have warned Australian companies could be at risk as they work to strike new deals with buyers.

Woodside is seen as vulnerable, given it has both shorter-term deals for its Pluto contract expiring in 2017 and contracts for the giant North-West Shelf in the early 2020s.

But Woodside said that less than 20 per cent of its LNG volumes are uncontracted until the end of this decade due to greater than expected flexibility on its existing Pluto exports.

Citi noted Woodside has renegotiated 11 LNG contracts, resulting in a slightly higher price on average and $US65 million of one-off reconciliation payments.

Energy companies have historically signed 25-year gas supply contracts with buyers, which have acted as a guarantee to finance the massive capital injections of more than $10 billion needed to support the construction of new LNG facilities.

However, a fall in the price of oil and an oversupply of LNG in the market has handed the power back to buyers, who are increasingly looking to either renegotiate long-term deals or simply buy the fuel on the spot market.


The spot LNG price in May of $US4.24 per million British thermal units in Asia is 42 per cent lower than a year ago, according to pricing service Platts.

Despite the positive news on LNG pricing, the overall investor update appeared to leave some analysts lukewarm on growth prospects for the stock.

"Leading up to the session, question marks were mainly concentrated around Woodside's growth and M&A outlook, given the decision to not proceed with a final investment decision on Browse FLNG," said JP Morgan's Busuttil. "Overall, there was nothing to change our view on the stock: near-term growth options still appear limited and management reiterated the view that large-scale M&A is unlikely."

Citi remains more positive, retaining its 'buy' and rating Woodside's base business a strong performer.

Coleman will get a better sense in the coming days of investors' reaction to his annual update. Over at Oil Search, meanwhile, Peter Botten will travel to Port Moresby to sell his transformative deal to InterOil shareholders.

Botten may have got one over his chief Australian rival on Friday.

But Coleman will hope he can size up a few of his own canny deals as prices stay low and put the company's PNG debacle firmly behind it.

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