All Eyes On Woodside’s Lousiana LNG Sell Down

Commodities | 11:21 AM

With shareholder returns limited until new projects come online, a sell-down of Woodside Energy's Louisiana LNG is key to de-risking the balance sheet.

-Woodside Energy's 2024 performance largely in line with forecasts
-Dividend slightly ahead on 80% payout
-Growth projects progressing
-Market's focus shifts to Louisiana LNG sell-down

By Greg Peel

Last week oil & gas producer Woodside Energy ((WDS)) published key 2024 line items which included an -18% cut to earnings per share. This week the company released its full result, which slightly beat consensus on earnings due to lower costs.

The dividend of US53c was also slightly ahead of consensus and represented an 80% payout ratio. Gearing of 17.9% is within the company's 10-20% target range.

Woodside also announced a -US$150m cost reduction target over 2025.

Management at the energy producer sees "continued capacity to pay strong dividends", and that "scenario modelling assumes 80% dividend payout ratio". As a result, despite gearing projected to run a little above the 10-20% target range, Macquarie raises its payout assumption to 80% for now.

The broker agrees with distributing out the franking account ($1.6bn), however Woodside may end up having to pay for this via dilutive dividend reinvestment plans (DRP).

The CFO reportedly admitted gearing would peak above the top end of the 10-20% target range but that cash generation post the start-up of Scarborough LNG would provide an opportunity to look at additional returns. In Jarden's view this statement is the opposite of current consensus sentiment, which is focused on downside risks around the current payout ratio.

Jarden assumes Woodside reintroduces a DRP at the next result, for the next three dividends, but based on forecasts, investors may need to wait until 2029 before incremental returns are possible. This may change, the broker notes, if commodity prices are materially higher over the next few years or Woodside divests assets to reduce debt over this period.

Down in Louisiana

The key positive for Ord Minnett is that Woodside is in advanced talks with several parties to sell down its stake in the Louisiana LNG project to 50%, which would provide substantial relief to the balance sheet as the energy producer invests to replenish its production base.

Management reiterated confidence in reaching final investment decision (FID) readiness for the three-train Louisiana LNG development from the March quarter, and continues to emphasise the strong interest received from potential partners in the project, highlighting a competitive cost and permitting position compared to other US Gulf Coast projects.

While Citi doesn't expect FID will be at 50% equity, getting to this level in the coming months seems more likely. Management rhetoric is positive as expected, but Citi's focus is more about the White House pressuring allies in India, Japan, and Europe to buy more US LNG.

With Louisiana LNG being FID-ready, permitted, operated by a genuine tier 1 operator, and EPC-signed (engineering, procurement and construction), it makes Louisiana a path of least resistance for US LNG exposure, which for Citi is a short-term positive.

Longer term, there may be too many LNG projects sanctioned, seeing economies affected by lower long-term Henry Hub (US) to Japan/Korea Marker price spreads, but it's too early to tell. Along with the risk of Russian gas, Citi reiterates it is not a fan of Woodside having used its commodity super-profits on marginal greenfield US LNG.

This broker notes the Woodside board must accept the recent share price fall has accommodated the reduction in portfolio quality, and so any sell-downs will likely improve both sentiment and fundamentals.

Woodside confirmed EPC arrangements with Bechtel were priced on the 16.5mtpa project. Ordinarily a sell-down of this scale would be a material de-risking event, however, UBS notes investor expectations are high and perhaps largely factored in already.

UBS' industry channel checks confirm competition for equity and offtake in US LNG projects has strengthened with a number of competing projects (for partners and offtake) seeking to accelerate development plans.

The US Department of Energy announced in mid-February it has granted an LNG export license to Commonwealth LNG -- the first approval of a new LNG export project under Trump 2.0.

Woodside entered into binding LNG offtake from Commonwealth LNG for 2.5mtpa over 20 years back in 2022, and provided the project takes FID in September this year as now planned, would see Woodside committed for around 20mtpa from the US Gulf coast alone.

Growth Projects

Woodside is making strong progress in replenishing its production base to compensate for expected output falls by 2030 from existing projects, Ord Minnett notes. The capital expenditure and cash flow required to do this, however, will keep the balance sheet tied up for some time, thus limiting the prospects for shareholder returns until the new projects come on-line.

There is also significant execution risk, Ord Minnett warns, in the scale of the projects being undertaken, another reason for preaching caution on the stock.

Across the development portfolio, Trion is progressing ahead (over 20% complete) and Goldman Sachs understands most fabrication is expected to be completed in Indonesia which could avoid potential US tariff changes.

Beaumont New Ammonia (83% complete) cash costs were confirmed and Goldman continues to expect a 10% internal rate of return for the project over 30 years of operation.

Scarborough (80%) and Pluto Train 2 remain on track for first LNG cargo in the second half of 2026, with Pluto Train 2 expected to begin commissioning this year. All Scarborough Phase 1 wells are expected to be drilled and completed by the end of 2025, subject to offshore WA weather.

Disappointingly for Morgans, federal approvals continue to be pushed out on the North West Shelf (NWS) extension. This broker now sees a high probability that the NWS JV will not receive these approvals before the next federal election (depending on timing), as once the election is announced it would not expect any movement on NWS approvals, while the election itself could deliver an (even more) difficult political landscape for the project.