Company Overview: Woodside Petroleum Ltd (Woodside) is an oil and gas company. The Company is engaged in hydrocarbon exploration, evaluation, development, production and marketing. It operates in three segments: Producing comprising North West Shelf (NWS) Project, Pluto Liquefied Natural Gas (LNG) and Australia Oil; Development comprising Browse floating liquefied natural gas (FLNG) and Wheatstone LNG, and Other. Its Other segment comprises trading and shipping activities and activities undertaken in the United States, Canada, Senegal, Myanmar and other international locations. Its North West Shelf Project is engaged in the exploration, evaluation, development, production and sale of liquefied natural gas, pipeline natural gas, condensate, liquefied petroleum gas and crude oil from the North West Shelf ventures. Its Pluto LNG project is engaged in exploration, evaluation, development, production and sale of liquefied natural gas and condensate in assigned permit areas.


WPL Details
 
LNG production from Wheatstone:Woodside Petroleum Limited (ASX: WPL) reported that their Wheatstone LNG has started production from their onshore facility near Onslow, Western Australia. The first LNG cargo would be out in the coming weeks, which is a major milestone for the Wheatstone LNG joint venture participants. The group intends to continue to focus on their costs while enhancing their production volumes, to maximize the value of their investment. The group’s initial LNG production from Wheatstone Train 2 is forecasted to be in the coming six to eight months. Wheatstone LNG is expected to contribute more than 13 MMboe to the group’s annual production after they are fully operational. On the other side, the group’s Pluto LNG delivered a solid daily and weekly production rates during the period, which is 3% higher as compared to their earlier record in the third quarter of 2016 post successfully finishing the high-rate trials. The high-rate trials show further capacity in the LNG train and for informed decision-making on expansion options for Pluto LNG. The group achieved reliability across the FPSO fleet of over 95%. As per the overall industry dynamics, the LNG market demand is ongoing especially from Asia Pacific. The group sees new LNG buyers especially from the emerging markets and accordingly is targeting these clients. New government policies supporting the use of gas coupled with subdued price levels is driving the LNG demand while China, India and Pakistan promise a solid upside potential in the mid to long term.
 
 
LNG Industry dynamics (Source: Company reports)
 
Delivered a solid bottom line rise:Woodside delivered a decent first half of 2017 performance, wherein their net profit surged over 49% to $507 million while declared an interim dividend of $0.49 per share during the period. The group’s operating cash flow enhanced 3% exceeding $1.2 billion while their free cash flow surged 170% to $445 million. The group continued to control their unit production costs, by 6% to $4.90 per barrel of oil equivalent, while their free cash flow breakeven price reached $34 per barrel of Brent. Their portfolio average realized price enhanced 10% year on year (yoy) to US$43/boe, as compared to the prior corresponding period. The group is mainly focused on exploration appraisal in Senegal and Myanmar during first half. However, they controlled overall exploration expense on the back of decline in well write-offs, decrease in general permit activities and lower seismic activities. Woodside also has a strong liquidity of US$2.59 billion, well positioning them to develop their business in line with strategy. The group delivered the gearing at 24%, which is within their target range; and has solid credit ratings of Baa1 and BBB+ from Moody’s and Standard & Poor’s, respectively.
 
 
Cash margins (Source: Company reports)
 
Expanding client base:The group made mid-term sales and purchase agreements for up to 16 cargoes, for delivery from 2017 through 2019. Their major client is Pertamina with whom the group executed a long-term sales and purchase agreement. This deal would enable the group to become a major supplier of LNG to Indonesia. Starting from 2019, the group would supply up to 1.1 million tonnes per annum. On the other hand, the group implemented a US$100 million term loan and guarantee facility with Norway’s export credit agencies and DNB Bank ASA.
 
Exploration pipeline: The group reported that the North West Shelf (NWS) Project participants agreed a tolling proposal, and discussions with third party resource owners for processing gas through the Karratha Gas Plant have started. The group also discussed the prospects of bringing Browse gas through the Karratha Gas Plant wherein the concept is much aligned to Browse joint venture. The Browse joint venture as well as North West Shelf project are currently progressing with a joint technical feasibility study wherein the group is targeting concept select in the second half of 2017. The Persephone project delivered 30% under budget and is six months ahead of the schedule. Their ongoing appraisal of the SNE field in Senegal would further enhance their confidence in the SNE development plan, aiming first oil in 2021-2023. The group started Pluto LNG expansion studies while contractors have been engaged to develop concept options. The group aims to target the selection of a Browse development concept in the second half of 2017. The Browse Joint Venture is aligned on Browse to NWS as the reference development concept subject to reaching acceptable terms and conditions on the development. On the other side, the group classified their Myanmar exploration as one of their Horizon II projects which would be developed between 2022 and 2026. Further, a 100% success rate of exploration drilling program in Myanmar has been reported along with a third discovery in the Rakhine Basin. WPL is also completing the acquisition of three blocks, AD-1, AD-6 and AD-8, while further drilling is planned towards end of this year. The group is investing for near-term growth, with over 70% of total capital expenditure as planned for the first half relating to sanctioned projects which would drive their 15% production growth between 2017 and 2020.
 
 
Exploration efforts (Source: Company reports)
 
Stock performance:The group controlled their breakeven cash costs of sale at $9.60 per barrel of oil equivalent. This is a relatively competitive cost position as compared to their peers. The group also has better EBITDA margins and return on average capital employed. Declining production costs drove their gross margins to 48% during the first half of 2017 as compared to 43% in the first half of 2016. The group is aiming to enhance their production to 15% from 2017 to 2020, driven by Wheatstone, Greater Enfield and NWS subsea tieback projects which would enable them to achieve their targeted production growth. The group continued with their plans for the Burrup Hub with major developments in North West Shelf, Browse and Pluto. In Senegal, they finished a five-well drilling campaign and in Myanmar they reported a solid flow rates on two appraisal wells with further drilling planned for this year. Their Senegal project is aiming FEED in 2018, while the group is planning to Drill Pyi Tharyar and Khayang Swal in Myanmar. Despite full-year spend on Wheatstone, the group’s control of their base business expenditure would offset the pressure to a certain extent. The shares of WPL corrected over 13.6% in the last six months (as of October 09, 2017) placing them at lucrative levels. WPL stock also has a decent dividend yield while the group intends to maintain their current payout ratio of 80% of net profit in the coming years. Recovering demand for LNG, low costs, strong exploration pipeline and rising production would continue to drive the stock higher in the coming months. We believe that investors can leverage the current subdued levels in the stock; and given the prospects, we put a “Buy” recommendation at the current price of $29.060.
 

WPL Daily Chart (Source: Thomson Reuters)

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