woodside’s us$2 billion cash conundrum

March 15, 2013, 11:16 AM
Woodside’s US$2 Billion Cash Conundrum

By Ross Kelly

As a hole opens in Woodside Petroleum Ltd.'s WPL.AU +1.28%oil and gas production outlook, the case is building for management to pull off a big acquisition or return some of its cash pile to shareholders.

Or it could do both.

That’s the view of Citigroup C +1.04%analyst Mark Greenwood, who says Australia’s second-biggest oil company after BHP Billiton Ltd. BHP.AU +0.41%could afford to launch a US$1 billion buyback of its own shares–even if it spends another US$1 billion buying a new asset.

“Based on our outlook for the timing of Woodside’s growth, we think that a buyback of US$1 billion could be implemented comfortably,” Mr. Greenwood says in a detailed 21-page analysis of Woodside’s options.

Calls for either a buyback or raised dividend are growing louder amid increasing doubts about three Australian liquefied natural gas, or LNG, growth projects that Woodside Chief Executive Peter Coleman inherited from predecessor Don Voelte last year.

Mr. Greenwood says a final investment decision on the Browse LNG project in Western Australia state, due in mid-2013, is expected to be pushed back until 2015 at the earliest, partly due to a “prohibitively high” construction cost of over US$45 billion.

Another growth project, Sunrise LNG, is mired in a political dispute with the tiny nation of East Timor over where the gas should be processed, while an expansion of the Pluto LNG project is stymied by a shortage of gas.

Already aware of a looming revenue crunch, Mr. Coleman last year agreed to buy a stake in the massive Leviathan natural gas discovery offshore Israel for more than US$1.2 billion. However, while a final investment decision on a smaller domestic gas project could happen this calendar year, Mr. Greenwood doesn’t expect a decision on a larger LNG project until at least 2015.

Of course, it’s not all doom and gloom for Woodside.

Last year’s startup of the foundation stage of its Pluto LNG project in Western Australia has boosted Woodside’s revenues substantially, while the older North West Shelf LNG project keeps chugging away. These “cash cow LNG assets” have kept Woodside’s debt-to-equity ratio down at a paltry 11%.

Mr. Greenwood says his US$1 billion buyback and US$1 billion acquisition scenario is feasible even if final investment decisions are taken on Browse and Leviathan LNG in 2015 and oil prices fall to US$80 a barrel from around US$93 currently.

And at A$36.24 each, Woodside shares are trading at a substantial discount to what Mr. Greenwood reckons is the company’s true value of A$41.43, making a buyback a prudent investment that could provide earnings accretion of 3.6% next calendar year.

Such a move could also provide partial relief to the bug bear that is Royal Dutch Shell PLC' RDSB.LN +0.27%s stock overhang.

A buyback would allow Shell to sell down some of its remaining 23% holding in Woodside. The Anglo-Dutch major has indicated a desire to exit its investment, but only at the right price.

Any premium offered through a buyback might be hard to resist and Mr. Greenwood estimates Shell could even sell more of its entitlement under the buyback to cut its interest in Woodside to around 20%.

http://blogs.wsj.com/dealjournalaustralia/2013/03/15/woodsides-us2-billion-cash-conundrum/