Australia | Dec 13 2012
– BHP a winner in Browse sale
– Woodside a winner by implication
– Risks and controversies nevertheless remain
– Still a long way to go
By Greg Peel
The yet to be developed LNG project sourcing offshore WA gas from the Browse Basin must be feeling like a child being passed from foster parent to foster parent. The announcement yesterday that BHP Billiton ((BHP)) has sold its stakes in the Browse East and Browse West joint ventures, representing about a net 10% of the Browse project, to Petrochina makes three different changes over ownership in 2012 alone.
The sale follows Chevron's earlier exit from the JV with its sale to Shell, and Woodside Petroleum's ((WPL)) partial sale of its stake to Mitsubishi Mitsui (MIMI). In purchasing the BHP stake, Petrochina steps up from being an offtake customer – a memorandum of understanding has been in place – to being a stakeholder. As of today, the Browse JV now comprises Woodside (31% and operator), Shell (27%), BP (17%), MIMI (15%) and Petrochina (10%).
Woodside has been holding Browse on its “expansion projects” list for some time now along with Sunrise and other “down the track” type assets. Ahead of Browse has always been the Pluto expansion, and the company is now working on Pluto-2. When the gas sector” exploded” a few years back and LNG became the asset of the future, the market was fired up over Woodside's impressive portfolio of various interests, including Pluto and Browse. Over time however, capex requirements for Pluto have risen and risen, the project has been beset with delays, and the face of the global gas market has changed with most recently the US suddenly shifting from importer to potential exporter.
These developments have not been good for Woodside's share price. In the background has sat Browse, which over time has, in the market's eyes, become less of an asset and more of a potential burden. With all the problems at Pluto, when was Woodside ever going to get Browse up and running?
Browse is a JV nevertheless, and as this year's ownership changes indicate it is still a valuable longer-term project. The market had all but written off Browse in valuing Woodside before the partial sale to MIMI rekindled interest. The project is not without its issues however, with controversial plans for a land-based LNG facility at James Price Point still up in the air and the possible alternative of a floating LNG facility representing a bit of a brave new world.
As far as BHP is concerned, its Browse stake was a bit of a sleeper that locked up some potential cash. BHP is these days not particularly interested in non-operator stakes in projects, and the issues surrounding Browse offer up the potential for costs ahead. Under the company's new austerity drive of sorts, and given transparency of valuation provided by earlier stake sales, it was a bit of a no brainer for BHP to sell its stake and release an estimated US$1.4bn into the kitty.
Most analysts ascribed little or zero value to the Browse stake in their BHP valuations after discounting for the risks and controversies. Thus from a BHP valuation point of view, the sale effectively represents “free money”. Analysts agree BHP has done very well out of Petrochina.
Also doing well from its point of observer is Woodside. The price paid by Petrochina for a slice of Browse represents a premium to the price paid by MIMI for a cut of Woodside's stake. The premium valuation is not quite as simple as price-to-price comparison given (a) different analysts' starting point valuations and (b) the fact there is an implicit offtake agreement in the Petrochina stake which attracts some sort of value. Hence while some analysts are talking a 17-20% premium, JP Morgan, for example, suggests the value is merely “a little higher” than the MIMI price. Comparisons with the Chevron sale to Shell are further complicated given the deal was an asset swap.
That said, Deutsche Bank suggests the BHP sale price represents $6.40ps for Woodside's 31% stake against the broker's valuation in its model of $4.10ps. While this sounds like a huge winner, Deutsche then discounts the price to represent the fact a corporate buyer, and in this case consumer (Petrochina), will always be prepared to pay more than a silent investor (the stock market). Furthermore, while the BHP sale implies a boost in Woodside's valuation, it's still only on paper. Value accretion for shareholders is only available, Deutsche notes, if Woodside goes ahead with the project and if it is profitable or if the company sells down further equity.
The James Price Point versus FLNG uncertainty also remains a risk for the Browse project. The WA government has mandated James Price Point, sending environmentalists into a frenzy of protest, while Chevron's determined opposition to JPP was seen as a reason for the company exiting the joint venture. As noted, FLNG is a new and largely untested concept.
Aside from any price premium implications, the fact a potential project dissenter in BHP has been removed and replaced by a gas consumer with an obvious incentive to see the project through is a positive for Woodside in JP Morgan's eyes. JPM also believes the sanctioning of the JPP development is an overhang that will be removed in recent months.
BHP's Browse sale is not the answer to all beleaguered Woodside shareholders' prayers, but it is a step in the right direction. And as far as analysts are concerned, the sale is a good win for BHP as well.
With no changes to broker ratings forthcoming at this stage from the news, Woodside retains four Buys, three Holds and one Sell in the FNArena database with a consensus target of $39.86.
BHP retains five Buys and three Holds with a target of $38.40.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.