Australia | Apr 16 2013
– Woodside shelves JPP, delaying Browse
– Many other options still available
– Capital return hoped for
– Brokers not all sure
By Greg Peel
“We have an obligation to deliver on growth if we have the opportunities,” said the Woodside CFO in February, “but if we can’t do that, or more likely if growth is delayed, then we have an obligation to return capital”.
Woodside Petroleum ((WPL)) and its project joint venture partners Shell, BP, Mitsubishi-Mitsui and PetroChina have spent two and a half years and US$1.25bn conducting a front-end engineering and design (FEED) assessment of the offshore Browse resource and its LNG production potential. The original option was to build a sizeable LNG conversion and export facility onshore at the environmentally sensitive James Price Point site in WA. Due to a blow-out in costs and other factors, the partners have elected to abandon the plan to build a huge JPP operation.
In Macquarie’s words, Woodside has “finally established that an onshore development is simply too economically, technically, environmentally and socially risky given the modest returns on offer. As a result, common sense has prevailed and the JV has gone back to the drawing board to work on an alternate solution while supply-side competition continues to build in global LNG markets”.
Browse has thus been delayed. On the CFO’s statement, we might assume that Woodside is now “obliged” to return capital to shareholders instead. It is not, nevertheless, cut and dried.
The company has suggested three alternatives for Browse LNG processing. Top of the list is a floating LNG (FLNG) facility, followed by a pipeline to the existing North West shelf onshore facility, and finally perhaps a smaller set-up at James Price Point. Brokers all agree that FLNG is the best option, and are using an FLNG valuation in their “base case” models. The technology and concept are only new and yet to be seen in Australia, but on the numbers an FLNG facility would provide the highest internal rate of return on funding for this element of the Browse project, analysts find. Shell is already planning two FNG facilities of its own in offshore WA.
As far as a capital return is concerned, the idea is that if there are no viable growth options for Woodside to pursue then patient shareholders are deserved of some reward, which would help return faith in the stock. Australia’s two big diversified miners have put themselves in a similar position by shelving major, controversial growth projects, albeit aside from a bit of a dividend increase neither has returned any meaningful capital to this point.
And there are no guarantees Woodside will do so either.
The company has several growth options on the books, all of which are long-dated and risky. They include Browse, Sunrise and an expansion at Pluto — all offshore WA — and Leviathan in Israel. But the company is still interested in pursuing M&A activities as well, with aspirations for a presence in Canada and/or Brazil on the agenda. Hence there is uncertainty, Citi suggests, surrounding what Woodside will buy, what it will pay, and also what the implications are for the existing, aforementioned growth options. The company cannot afford to pursue all options, and somewhere in between lies this “promise” of a capital return. Woodside certainly can’t afford returns on top of everything else.
On that basis, Macquarie sees limited scope for anything other than a “token” gesture on the capital front for the simple purpose of appeasing the market. If any one of the above options is sanctioned over the next five years then distributable cash flow will dry up very quickly, the broker warns. Were Woodside to issue a special dividend now, it would suggest to the market growth options are no longer worthy of pursuit, which would not be good for the share price anyway.
Citi is leaning towards Macquarie’s train of thought in suggesting a US$1bn share buyback is “feasible” under a certain suite of assumptions, including Woodside proceeding with Browse FLNG and Leviathan LNG in parallel from 2015. Given growth clearly remains a priority, any capital management would have to be carefully considered, Citi suggests, and not likely until towards the end of this year.
UBS expects Woodside would look to a combination of higher sustained dividend and on off-market buyback to the tune of 5% of capital, which would use up US$1.2bn in cash and half a billion in franking credits. UBS expects no special dividend, and suggests the focus “will remain on growth”.
The UBS scenario is 3.8% earnings per share accretive in FY14. Deutsche Bank is pitching for a $2.5bn buyback, which would be 8% EPS accretive and also use up half a billion in franking credits, which total around $3.4bn.
JP Morgan is the most confident of the brokers in the FNArena database who have since updated their views. Say the analysts:
“We think Woodside’s decision not to proceed with a Browse development onshore at James Price Point is a victory for common sense and a strong endorsement of Woodside’s capital stewardship credentials. In our view, Woodside has avoided what stood to be a marginal project likely to have been fraught with opposition from community and environmental groups. We turn our focus to the capital management opportunity and are retaining our Overweight recommendation.”
Significant within JPM’s Buy-equivalent rating is the prospect of a “material” capital return following the deferral of the Browse project. The analysts believe an 11% off-market buyback, representing some US$3bn, would be “comfortably” within Woodside’s means. An off-market buyback is a preferred option among brokers above a special dividend as the latter would not be able to exploit the company’s excessive pool of franking credits.
Another option would be to clear out part of the overhanging Shell shareholding, but again this leaves the issue of excess franking credits, JP Morgan notes. And the analysts suggest the Board would opt for a more equitable treatment for all shareholders.
Clearly there is no consensus on whether or not, and if so by how much, among brokers with regard to capital management. It all comes down to Woodside’s specifically stated growth plans, the potential for any one or more to move forward, and anything else the company might buy or buy into across the globe in the meantime. As has previously been suggested, a capital return might be nice for shareholders on face value but for the longer term, this upfront bonus implies Woodside has no means of growing its value for the foreseeable future. Swings and roundabouts.
There have been no ratings changes from any of the FNArena database brokers to date following the James Price Point announcement, and only minor target price fiddling. Stock Analysis shows two Buy, four Hold and two Sell or equivalent ratings on a consensus target of $39.36, which suggests 11.7% upside from the last traded price.
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