Australia | Nov 28 2011
– Woodside guidance disappoints on production, capex
– Stockbrokers lower forecasts, price targets
– Confidence in management shaken says BA-ML
– Buy ratings still dominate
By Chris Shaw
Woodside Petroleum ((WPL)) held its annual investor update last Friday and the news with respect to production guidance was disappointing. While Pluto should deliver a reasonable result of 17-21mboe (million barrels of oil equivalent), the base business is where the the numbers will fall short of market expectations.
As Macquarie notes, the base operations are expected to generate production of 56-60mboe for 2012. This represents a decline of around 9%. The news was disappointing to Citi, particularly as management at Woodside had previously expressed confidence in being able to de-bottleneck the North West shelf operations and given a strong recent quarterly production report.
At the same time, capex will be higher than forecast at $2.3 billion next year, almost double the amount Macquarie had been expecting. Citi also noted capex for Pluto-1 now appears to include some extra requirements not previously communicated to the market, while not containing an amount consistent with FID for the Browse project in 2012. This confirms a likely delay to the project in Citi's view.
To reflect the details of the update, stockbrokers across the market have adjusted earnings forecasts lower for Woodside. Macquarie has cut its 2012 numbers by 12%, while Citi has lowered its net profit forecast by 14% to $1.34 billion. This is below market consensus and Citi expects its earnings will remain below consensus once normalised for the oil price, this due to a likely deep discount to LNG prices expected for Pluto-1.
Deutsche Bank's earnings per share (EPS) estimates have declined by 13% for the coming year, while consensus EPS estimates for Woodside according to the FNArena database now stand at 213.4c this year and 209.5c in 2012 (signalling negative growth next year).
The changes to earnings estimates have meant cuts in price targets, the database showing a consensus price target for Woodside now of $40.10. This compares to a consensus of $44.00 prior to the update.
The update from Woodside has been enough to prompt two downgrades in ratings. BA Merrill Lynch has moved to Underperform from Neutral, reflecting a loss of confidence in management's ability to hold Woodside's trading value in the year ahead given growing scepticism with respect to delivery from existing assets.
As BA-ML points out, other assets such as Sunrise and Pluto are simply not material enough to impact on earnings to the extent implied by the broker's changes to forecasts. This means the axe has been taken to forecasts for the North West Shelf assets, which implies the strong operational performance required to meet valuation is simply not being achieved.
UBS has not been as severe in rating terms, downgrading Woodside to Neutral from Buy to reflect significantly lower revenue expectations. These stem from cuts to earnings estimates of nearly 30% in 2012 and 16% in 2013.
In the view of UBS, there are now likely to be material delays for the potential Pluto-2 LNG expansion and the proposed Browse and Sunrise developments. Gaining regulatory approvals, finding supportive LNG volumes and buyers and funding for these projects now looks far more challenging according to UBS.
Even those retaining Buy ratings on the stock are not totally sold. RBS Australia is an example, as while the broker suggests the share price reaction to the lowered production guidance appears overdone, implying value in the stock, there is still better value elsewhere in the sector, argues RBS.
Citi agrees, as while retaining a Buy rating on Woodside the broker makes the point its preference among the large cap plays in the sector at present is with Santos ((STO)). This is due to the stock being cheaper than Woodside in relative terms and because Santos offers both greater earnings certainty and a better growth outlook.
Overall, the FNArena database shows Woodside is rated as Buy five times, Hold once and Sell twice. Targets for Woodside range from BA-ML at $35.25 to JP Morgan at $44.28, which highlights the variation in broker models of the stock at present.
Shares in Woodside today are lower and as at 12.20pm the stock was down 61c at $32.75. This compares to a trading range over the past year of $29.76 to $50.85. The current share price implies upside of around 22% to the consensus price target in the FNArena database.
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