Australia | Feb 18 2016
-Protecting credit rating paramount
-Browse FLNG likely to be deferred
-Large M&A unlikely
By Eva Brocklehurst
Amidst global gloom on the oil price outlook, Woodside Petroleum's ((WPL)) 2015 results were anxiously anticipated. The welcome news is the final dividend is intact, with Woodside maintaining an 80% pay-out ratio. An underwritten dividend reinvestment plan (DRP) has been re-activated for the first time since 2012.
The company remained true to its reputation for discipline, cutting costs and reducing its cash cost of sales to US$11/bbl. Management has stressed preserving cash is paramount to protecting its investment grade rating. Hence, the re-instated DRP.
To Credit Suisse, protecting the business and credit rating is an action others in the sector probably wished they had taken before balance sheets became out of control. With gearing at 23% still relatively high, the decision suggests to the broker that there is little balance sheet capacity for M&A opportunities.
Deutsche Bank expects further cost reductions will become apparent in 2016 and the full benefit of initiatives is realised. This should help to offset the headwinds generated by the low oil price.
The Browse FLNG outlook continues to be challenged by the lack of cost competitiveness in the current market for LNG projects. The company has signalled further cost reductions are needed in order for Browse to progress. Most brokers suspect the project is now on the back burner. Wheatstone, 65% complete, is now targeting LNG in mid 2017. Deutsche Bank continues to assume first LNG in early 2018.
UBS is not surprised by the delay at Browse, with the macro oil environment dominating the investment outlook. The broker expects, beyond the Wheatstone start up, future growth will have to depend on more discoveries. Recent exploration success in Myanmar is considered a positive development but will take time to play out. UBS downgrades to Neutral from Buy at this juncture, given the recent rally in the share price.
Woodside is managing the low point of the cycle well, Morgans believes. The broker envisages the cost structure for both Browse and Kitimat will ultimately mean both projects are shelved. Woodside's growth profile may be undersized, given the scale of its business, but the broker gained confidence that the company is unlikely to stretch its balance sheet to pursue M&A, although an exploration acquisition could be possible.
Deutsche Bank also notes potential for M&A is diminishing. The company pointed to the large differential between buyers and sellers. Vendors are pricing assets on the back of a higher oil price and the company is not willing to gamble surplus capital on a material oil price recovery, preferring to consider small accretive opportunities.
Such acquisitions are unlikely to re-focus attention from the Carnarvon Basin and high-cost Browse Basin, Macquarie observes, and could dilute the company's concentrated portfolio. The broker envisages a DRP is the company's preference to flexing the capital program or the dividend, effectively relying on equity markets to reduce its break-even point.
The company ended the year with liquidity of US$1.7bn, representing the lowest level in six years, Macquarie observes. With management targeting US$2bn in liquidity for the end of2016 and the business at break even, this leaves little surplus capacity in the broker's view. Macquarie also suspects productivity initiatives are coming to a conclusion.
Citi considers the decision to fully underwrite the DRP in this half year should be taken as another move to make Browse possible, although accepts the economics are not favourable and investors should be primed for further delay.
The growth outlook is challenged in the lower-for-longer oil price scenario. That's a certainty in Morgan Stanley's view. The broker lauds the company's cautious approach, as it plans its business around a prognosis for US$35/bbl for the next two years.
Morgan Stanley expects Browse will be deferred. Kitimat is at an early stage of appraisal but the broker expects the economics will be challenging. Elsewhere, exploration is longer dated and drilling activity looks relatively light.
In terms of the dividend, the broker suspects the significant amounts paid over recent years will come to a halt in 2016, as lower oil prices reduce accounting profits. On the broker’s modelling Woodside is around accounting break-even at US$40/bbl. The company may choose to pay a dividend regardless, but the broker warns this is not guaranteed.
FNArena's database has one Buy (Citi) and seven Hold ratings for Woodside. The consensus target is $27.51, signalling 3.1% downside to the last share price. Targets range from $22.90 (Deutsche Bank) to $32.03 (Citi).
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