Australia | May 02 2012
– Woodside monetises part of its Browse stake
– Transaction supportive for the project
– Deal a positive for valuation
– Brokers lift targets for Woodside
By Chris Shaw
Yesterday Woodside ((WPL)) announced details of a proposal to sell a 14.7% stake in the Browse LNG project to Mitsubishi-Mitsui (MIMI) and the proposal has generally been well received by brokers covering Woodside.
The transaction involves MIMI taking a 16% stake in the East Browse joint venture and 8% of the West Browse JV, which will reduce Woodside's stake in the overall project to 31.3%. Woodside will receive US$2 billion as consideration for the deal, while MIMI will also off-take 1.5 million tonnes per annum of LNG from Woodside's equity share of the project. Existing partners in the Browse project are considered unlikely to exercise pre-emption rights.
According to UBS, the agreement implies Woodside's stake in the Browse project is worth $7.68 per share, which reflects both the price paid by MIMI applied to Woodside's remaining stake and the US$2 billion cash it will receive as part of the proposal.
While MIMI may be willing to pay a premium for its investment given the deal means the provision of a long-term stable supply of LNG, UBS suggests the market is likely to see less value in Browse given the longer-term nature of the development and the fact a Final Investment Decision has yet to be reached on the project.
Given this risk UBS continues to risk-weight its Browse valuation at 50%, so the transaction as proposed sees the broker lift its valuation and price target for Woodside by $2.65. Deutsche Bank is similarly positive in that it suggests the price being offered by MIMI implies a 77% risk weighting for the Browse project.
It would be unrealistic to expect the market to pay the same implied risk weighting as MIMI in the view of Deutsche, so the broker's project risk weighting has increased to 40% from 30% previously. This, along with some minor changes to earnings estimates, generates an increase in price target to $47.00 from $45.45 previously.
Targets for Woodside have in general increased on news of the proposal, the FNArena database showing a consensus target now of $41.58, up from $40.29 previously. Targets range from BA Merrill Lynch at $33.38 to Deutsche Bank at $47.00.
From a fundamental perspective JP Morgan notes the deal is a boost for Woodside as it both reduces its exposure to the Browse project, secures an off-take agreement and crystallises some project value in cash.
As well, MIMI being involved in the Browse project better aligns the joint venture with the North West Shelf joint venture in the view of JP Morgan, which offers potential positives such as a North West Shelf tieback concept.
The key for the Browse project going forward in the view of RBS Australia is will the project become a greenfield development at James Price Point or will there be a tie-in to the North West Shelf. For RBS the former remains more likely given the retention lease conditions already signed by JV partners and the fact a back-fill to the North West Shelf is more net present value negative to the joint venture than it is positive to the Browse joint venture.
Others are not so sure, the likes of Moelis suggesting the Browse deal makes an alignment of North West Shelf and Browse interests a viable alternative to a greenfield development. Goldman Sachs tends to agree given its view a greenfield project at Browse looks challenged.
On news of the proposal JP Morgan has upgraded Woodside to a Neutral rating from Underweight previously, this as the valuation boost implied by the deal means the previous negative rating can no longer be justified.
There have been no other changes in ratings for Woodside, the FNArena database showing the stock is rated as Buy five times, Hold twice and Sell once, this courtesy of BA-ML. Neither Moelis nor Goldman Sachs are in the database but the brokers have respective Hold and Buy ratings on Woodside.
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