Woodside US LNG Purchase Stirs Heated Debate

Commodities | 2:06 PM

Woodside Energy's planned acquisition of a downstream US LNG processing project is a shift in direction for the long-standing upstream developer. Analysts are split on whether this is a good deal or a bad one.

-Woodside Energy intends to acquires Driftwood LNG project in Louisiana
-Driftwood has no gas reserves of its own
-Woodside will thus be exposed to volatile input/output spreads
-Most analysts yet to be convinced of the benefits

By Greg Peel

Woodside Energy's ((WDS)) June quarter update revealed a minor fall in production in the quarter and a small rise in revenues due to higher prices largely offsetting each other. Otherwise, the key takeaway was a further 4% increase in the estimated cost of the now 67% completed Scarborough gas project off the Pilbara coast of Western Australia.

But the bombshell announcement involved the acquisition of US-based LNG infrastructure developer Tellurian Inc, which boasts the key asset of the proposed (but fully permitted) Driftwood LNG project on the Gulf coast of Louisiana.

The announcement raised many eyebrows, and set off quite a debate among oil & gas analysts locally.

A Pivot in Approach

Woodside has traditionally explored for, found and developed gas reserves, before building the infrastructure (processing "trains") to convert natural gas to liquid natural gas. The upfront costs are large, but once up and running, the operating costs are very low. At that point, the developer is simply exposed to the fluctuating price of LNG.

Driftwood LNG does not have its own gas reserves, it is simply an LNG processing facility. This means Woodside would need to buy in the gas, which would be subject to the US domestic Henry Hub price. Whereas developing and processing its own gas reserves leaves Woodside exposed only to LNG prices, Driftwood leaves the company exposed to both input (Henry Hub) and output (LNG) prices, and the spread between both.

It is a pivot for Woodside. As Jarden puts it, this "proposed transaction differs materially from Woodside's historical LNG involvement".

At US$1.00 per share, Woodside is paying a 72% premium to Tellurian's pre-offer share price to acquire Driftwood. But as Morgans notes, the offer still sits some -42% below Tellurian's share price one year ago, hence it is "a timely move on a friendly deal".

The deal remains subject to Tellurian shareholder approval.

Driftwood

The project has a Phase 1 capacity of 11mtpa LNG volume and is targeting final investment decision readiness by the March quarter 2025. Driftwood could eventually be expanded to 27.6 mtpa capacity.

Cost estimates of -US$900-960/t imply Phase 1 gross capex of -US$9.9-10.6bn. Woodside plans to sell down equity and retain a 50% interest in the project, though it has not stated how much LNG exposure it would retain. The company says the transaction creates an "LNG powerhouse".

Jarden estimates Woodside's LNG sales volumes will increase from a minimum of 11.5mtpa in 2030 to 16.8mtpa - a significant increase, but still less than 3% of forecast 2030 LNG market share (some 600mtpa).

Management said its proposed investment in Driftwood is consistent with its capital allocation framework of 12% internal rate of return (IRR), and payback within seven years of start-up. If approved, Woodside intends to fund the acquisition and Driftwood capex via debt. The company's gearing was 13% as at June, according to management.