Its Over, page-22962

....the problem with large cap resource companies is that their management at some stage have to do M&A to grow, because they are dictated by shorter term imperatives, as exploration takes too long to realise, and when commodity prices are on the decline, they may rush to make a large acquisition that turns out to be a lemon.

....the market is clearly not enthused with WDS latest acquisition which saps its war chest of $900m, which could mean less dividend. And these hodlers buy and keep them for dividends, expecting them to remain as good every year.

....for large resource companies, they exactly underperform for this reason - they squander the company's potential by overpaying an acquisition or one which is incorrect fit. We have seen so many, which helps explain why they don't deliver the growth expected in their stock price over time.

...trying to escape a political cost risk locally, WDS just landed themselves into another, in Trumpland. Speak of poor timing.


Chanticleer
Just days after Donald Trump declared he wants to “drill, baby, drill”, Woodside has placed a $22 billion bet on an unloved LNG project in the US. This bargain deal isn’t without risks.
Jul 22, 2024 – 3.58pm

In the febrile atmosphere of global politics, the timing of Woodside’s $22 billion bet on the US LNG sector couldn’t be more delicious.

On Friday, Donald Trump thrilled the Republican National Convention by promising to drive American energy prices down by embracing fossil fuels. “We will drill, baby, drill,” he declared, to a rapturous crowd that quickly took the phrase up as a chant. “We will do it at levels that nobody’s ever seen before.”

On Monday, Woodside announced a $US1.2 billion ($1.8 billion) bet on a US LNG project that the company’s chief executive, Meg O’Neill, says can help turn the $55 billion energy giant into a “global LNG powerhouse”.

So, is this an astute bet on the politics of energy? O’Neill was playing down that angle on Monday, saying that while a president’s team might support one project or another, due process ultimately rules.
But at its heart, this is a bet that LNG has a bigger role to play in the world’s energy needs – and a more fossil fuel-friendly US government will hardly hurt that story.


In the last decade, O’Neill says, demand for LNG rose 60 per cent. On the numbers of industry consultancy Wood Mackenzie, demand is set to leap another 50 per cent between now and 2033. “LNG demand continues to grow globally, and this acquisition increases our exposure to this market and strengthens our position as a global LNG player,” she told investors and analysts on Monday.

Still, O’Neill’s bet isn’t without risk.

Citi describes the company that Woodside has bought, New York-listed Tellurian, as “distressed,” but frankly that looks like a very kind description.

In the last six months, the company has ousted its co-founder, the LNG industry pioneer Charif Souki, farewelled its chief executive, and watched its share price sink more than 60 per cent. Even under new management, Tellurian, has failed to sell down its Driftwood LNG project in Louisiana to equity partners, or secure the long-dated LNG offtake agreements that it requires to fund the estimated $US15 billion capital investment needed for the first two phases of the project.

So why does O’Neill think she can do what Tellurian has failed to do since it was established in 2016? Because of its big balance sheet and what O’Neill claims is the Australian giant’s “deep capability” in the LNG sector.

Where US operators would typically approach Driftwood as a piece of infrastructure – buy natural gas from US producers, turn it into LNG, and sell it via long (often 20-year) offtake agreements – Woodside believes it can apply elements of the Australian LNG sector business model, under which the LNG producer typically controls everything, from the upstream extraction of gas, to the LNG processing, to the marketing and trading.

Under the hybrid US-Australian model that O’Neill envisages, Woodside will buy gas from the deep US market, turn it into LNG at Driftwood and use most of this gas to feed its broader marketing portfolio.

Or to put it another way, Woodside’s balance sheet means it doesn’t need to fund Driftwood through the sort of long-term contracts that Tellurian was hunting for. Instead, it can use the LNG produced in Louisiana to sell to customers in Asia, Europe and the US.

“We are LNG experts. And the ability that we bring to the project is to be able to move this forward on the strength of our capabilities in the marketplace,” O’Neill says.

She sees other important ways in which the project carries less risk than it might first appear.

The first is that it is already under construction, with about $US1 billion worth of engineering and civil construction work in Louisiana under way or completed. A lump-sum, turnkey construction contract with Bechtel is in place.

Secondly, risk is reduced because the project is staged; phase one and two, which would produce 16.5 million tonnes of LNG per annum, can be built first, with two further phases (and two further LNG trains) as options to take total capacity to 27.6 million tonnes per annum.

Thirdly, and most importantly, Woodside plans to find equity partners to help reduce Woodside’s share of the capital costs of Driftwood. O’Neill says the company has no shortage of inquiries from potential partners that want exposure to the US LNG market.

If Woodside can sell down 50 per cent of the Driftwood project, then Citi’s James Byrne argues that it should be able to meet both its increased capital expenditure requirements and investor dividend expectations; the energy giant’s gearing sits at just 13 per cent, and it has about $US8 billion of surplus cash it will be able to call on between now and 2028.
Key risks

Byrne argues Driftwood offers plenty of growth optionality, and helps to reduce Woodside’s concentration on the Scarborough project, which accounts for about 30 per cent of Woodside’s existing (pre-Tellurian) LNG portfolio.

“This is precisely the type of deal that we think works for fixing Woodside’s structural issues,” Byrne told clients on Monday.
But he does highlight two key risks.

The first, surprisingly, is US politics. While Trump wants to drill, baby drill (never mind that under President Joe Biden, no country in history has ever produced or exported as much oil as the US is currently) there is a danger that the desire to reduce energy prices could eventually result in restrictions on LNG exports.

“Woodside would take US protectionism risk because there are no take-or-pay contracts for the offtake” given Woodside wants to use Driftwood’s capacity to feed its own marketing portfolio.

But the biggest concern for Byrne and several other analysts is whether Woodside can achieve the 12 per cent internal rate of return it reaffirmed as its target on Monday. Typically, projects like Driftwood would generate internal rate of returns of around 8 per cent, more in line with infrastructure projects.

O’Neill says Woodside would be able to take advantage of its enlarged LNG portfolio, with its exposure to both the Pacific and Atlantic gas basins, to sell LNG into Asian markets, European markets, or via contracts indexed to the oil price, depending on where it can get the best price.

Analysts recognise the arbitrage opportunities are there, but question whether they are big enough to generate up to 400 basis points of extra margin so that Woodside can meet its 12 per cent internal rate of return target. That probably explains the 2.5 per cent fall in Woodside’s share price on Monday.

Chanticleer sees two other key risks O’Neill will need to consider as Woodside targets a final investment decision on Driftwood in the March quarter of next year.

The first is the climate aspects of this deal. O’Neill argues that LNG is a key transition fuel, and so the Tellurian acquisition is in line with Woodside’s climate commitments. But having rejected Woodside’s climate action plan last year, the energy giant’s investors may be sceptical about this argument.

The final risk is strategic. Woodside’s desire for geographic diversification is logical, and this deal looks like a relatively low cost, low-risk way to achieve it.

But investors will want to be sure Woodside’s sudden desire to be a global LNG powerhouse doesn’t mean it stretches itself to meet an overarching ambition. Accepting a lower return could be an example of just that.