Australia | Jul 04 2013
-Brokers re-work dividend outlook
-Impact on valuations modest
-Question of pay-out sustainability
By Eva Brocklehurst
Woodside Petroleum ((WPL)) has hit a bump in its production ramp up at Pluto LNG. The interruption may be one-off, but with investors highly sensitive to yielding stocks in the current commodity environment (as Woodside has now transformed itself into) the production downgrade has weighed on the outlook. Moreover, the re-start of the Vincent FPSO (floating production & storage facility) has slipped another three months and the facility will not be producing until October.
The unscheduled shut-in at Pluto, combined with an extended maintenance timetable at Vincent, has resulted in a downgrade to 2013 production to 85-89mmboe. The problem at Pluto is attributed to moisture in the gas stream. The unit is due to return to service within the next couple of weeks and there is, reportedly, no design or safety issues. Woodside does not anticipate any recurrence (pointing to an operator error in Macquarie's view).
Repairs are expected to cost less than US$10m and the company does not expect any mitigation cargoes will be required to cover contractual obligations. Credit Suisse suspects the revenue impact could be as high as 15% of earnings as lost LNG production may result in fewer spot cargoes being sold, even though contractual obligations are expected to be met. Morgan Stanley has also assumed Woodside may need to buy LNG cargo on the spot market and, hence, lowered US dollar earnings forecasts by 11% for 2013.
Vincent's added work can be covered by existing contingencies but, prior to the shut-in at the end of 2012, Vincent was Woodside's top production contributor accounting for 36% of 2012 oil production and 7% of total production. All up, the reduced guidance range points to a weak second quarter, in Macquarie's view. As a result, the broker's forecast is for a 9% quarter on quarter production decline. For UBS, the downgrade highlights the risk in having a 90% equity position in an asset (Pluto) that produces over 3mmboe per month gross and comprises around 40% of the company's total production. As Pluto is a single train project, this results in all production being shut-in while repairs are undertaken.
JP Morgan is one of the more upbeat and retains an Overweight rating. The broker sees the downgrade as a deferral rather than loss of production and, despite the hiccup,Woodside still has free cash flow and yield appeal. JP Morgan forecasts a 2014 Australian dollar-based free cash flow yield of 12%, the highest among global peers, and finds a 7.3% net dividend yield compelling. This difference indicates to the broker the company has the capacity to pay more out in dividends or buy-backs. Macquarie sees the generous 80% pay-out ratio causing pressure on the near-term dividend outlook and softer operations are likely to result in a 7% cut to full-year dividends. This will disappoint those attracted by the yield.
Credit Suisse has lowered earnings forecasts by 13% for 2013 and 7% for 2014 and reduced the 2013 dividend forecast to US$2.13 (from US$2.45 including the US63c special dividend). Despite this, the valuation impact is considered modest and brokers have not seen fit to change recommendations. Morgan Stanley sees the impact being mitigated by the falling Australian dollar and believes the yield attributes are intact. Moreover, the broker considers the risk/reward tilting in favour of reward. It's just there's no immediate catalyst for a re-rating.
BA-Merrill Lynch has also revised 2013 dividend forecasts to US$2.25, placing Woodside on a 6.6% yield. The broker believes this highlights the instability of the company's dividend story, as it remains exposed to the oil price and the operational interruptions such as this.
The growth profile in the medium term is also a concern for Merrills, as it is contingent on the challenges at the Leviathan project. The yield may offer some support, but will not drive outperformance as it is unsustainable if the company intends to reinvigorate growth. Again, the oil price is cited as one of the reasons for the unsustainability of the yield. Citi expects Woodside to make particular progress on the Browse FLNG and considers the strong dividend yield supportive. In fact, the broker believes the 80% pay-out ratio is sustainable to 2020, having put the case recently in support of an upgrade to a Buy recommendation. This production downgrade does not alter that view.
On the FNArena database there are three Buy ratings and four Neutral. CIMB has an Underperform rating but is yet to update on the latest developments. The consensus target price is $38.23, suggesting 8.3% upside to the last share price. The consensus target price has slipped over the last week from $38.78.
See also, Another Special Dividend To Come From Woodside? on June 20.
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