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
 
H1FY17 driven by higher price realizations despite low sales volumes: For H1FY17, Woodside Petroleum Limited (ASX: WPL) has recorded a 49% year on year (YoY) growth in net profit after tax (NPAT) at US$507 million, while posting $139 million increase in revenue to US$1.76 billion due to higher prices. During the period, average realised price increased by 10% to $43 per barrel of oil equivalent (boe). However, sales volume was lower and this impacted the revenue by $136 million (statutory revenue fell 4% to $1,869 million). Lower sales volume was largely due to lower LNG production, lower NWS pipeline gas volumes impacted by a change in venture equity, and discontinuation of oil operations in 2016. Production from continuing oil operations increased due to strong operational performance across the floating production storage and offloading (FPSO) fleet and the timing of the Okha FPSO dry dock in 2016. Other variances have resulted in a $48 million revenue reduction, due to 2016 NWS LNG price review payments. Production costs decreased by $33 million, and the reduction was impacted by operations that were discontinued in 2016 and lower shutdown activity. Sustained structural cost reductions continue to underpin low unit production costs, while exploration and evaluation expense decreased by $128 million. The reduction was predominantly due to reduced seismic activity and an increased proportion of capitalised drilling. A reduction of $78 million in depreciation was predominantly driven by reserves’ revisions during the period as increase in Greater Pluto developed reserves following start-up of the PLA05 side-track well, and an increase in Greater Enfield undeveloped reserves following final investment decision. However, this was partly offset by the impact of higher production volumes from the Okha FPSO and NWS LNG.


H1FY17 Financial performance (Source: Company reports)
 
Capital allocation and Debt service: During H1FY17, the company generated $1,235 million of operating cash flow and ended the period with strong liquidity of $2,593 million, consisting of $299 million in cash and $2,294 million undrawn debt. Free cash flow is up 170% from H1FY16 to US$445 million and break-even oil price for the period was US$34 per barrel. As at 30 June 2017, net debt stood at $4,745 million with gearing remaining at 24%, within the target range of 10% to 30%. WPL’s credit ratings remain unchanged with Moody’s and S&P Global at Baa1 and BBB+, respectively. Further, near-term maturities are low, with only $42 million in debt facilities maturing before 2018. Capital expenditure in H1FY17 was $651 million, down from H1FY16 expenditure of $754 million. Approximately 70% of this was invested in currently sanctioned projects, including Wheatstone LNG, the Greater Enfield Project and the NWS subsea tieback projects, which are expected to contribute to production growth of approximately 15% from 2017 to 2020. Exploration and appraisal wells were drilled in Senegal and Myanmar during the period. Moreover, company’s operating assets have low sustaining capex requirements, and sustaining capex during the period was $32 million. A fully franked 2017 interim dividend of US 49 cps has been declared, 44% higher than H1FY16 due to higher NPAT.
 

Peer leading performance (Source: Company reports)
 
Portfolio across three distinct horizons: Horizon 1 is characterised by increasing returns, investments in committed growth and being investment-ready for significant LNG developments. The company has committed growth from the Wheatstone LNG, Greater Enfield, Greater Western Flank Phase 2 and Persephone projects. These committed projects are expected to underpin targeted production growth of approximately 15% from 2017 to 2020. Additional production is targeted from the lower capital intensity expansion of Pluto LNG within this period. The SNE Development offshore Senegal is targeting first oil between 2021 and 2023. The cash generated in Horizon I and continuing into Horizon II will enable WPL to invest in the LNG projects that will be required to meet a projected LNG supply shortfall in Horizon II.


Portfolio targets across three distinct horizons (Source: Company reports)
 
Lowering the capital intensity of projects to minimise payback periods: Horizon II is targeted to deliver developments that maximise Woodside’s existing infrastructure and provide additional production into a rebalancing global market through growth funded by base business and Horizon I growth. The company is targeting first production from Browse, Scarborough and Myanmar to meet growing global gas demand within this period. Further, the company’s focus is on lowering the capital intensity of these projects to minimise payback periods, while prioritising capital efficient developments utilising existing infrastructure. The establishment of a hub on the Burrup Peninsula is a key feature of its plan to develop new resources in the Carnarvon and Browse Basins. Horizon III will target repeating the successes of the previous horizons, with capital efficient developments in new major hubs that leverage Woodside’s distinct capability set. Kitimat and Sunrise, together with exploration success from global portfolio, are targeted for development within this period. Moreover, a key focus is ensuring Woodside's opportunities have a globally competitive cost of supply and production.


Targeting concept in select H2FY17 and FEED in 2019 at Browse (Source: Company reports)
 
Pluto LNG expansion: Pluto LNG expansion studies have progressed, with contractors experienced in small-scale to mid-scale LNG train technology engaged to develop concept options. Accordingly, expressions of interest have been sought for FEED and the development of construction information to support finalisation of a contract execution plan and FID schedule. A transfer pipeline connecting Pluto LNG and Karratha Gas Plant (KGP) is also being investigated by Woodside, and the study is considering the acceleration of Pluto production using KGP capacity. As part of the Pluto LNG expansion studies, warm and cold high-rate trials were conducted at Pluto LNG, which demonstrated that the front end of the LNG plant can process an additional 0.7 mtpa. The focus of these trials is to consider the feasibility of developing and accelerating reserves within the Greater Pluto region.
 

Pluto LNG expansion (Source: Company reports)
 
Offshore Senegal development update: Two appraisal wells were completed under budget and ahead of schedule during the period in addition to the exploration wells at Senegal. The SNE-5 well completed two drill stem tests in the upper reservoir (S400 series) units over gross intervals of 18 m and 8.5 m, providing further understanding of complex reservoirs. The SNE-6 well provided insight into the level of reservoir connectivity by an interference test with SNE-5. The Vega Regulus-1 exploration well had an appraisal element and encountered the lower (S500 series) reservoirs in the SNE field within the oil column as anticipated. Additionally, the foundation development concept for SNE is a stand-alone FPSO facility with an expansion capability for future tiebacks. A phased development initially focused on the less complex lower reservoir units is targeting first oil in 2021 - 2023. Importantly, Woodside is now the development lead for SNE oil and plans to transition to operator in due course.


Targeting FEED in 2018 at Senegal (Source: Company reports)
 
Operational excellence: Pluto achieved an annualised loadable LNG production rate equivalent of 4.6 mtpa (100% project) in H1FY17, and achieved record daily & weekly production records following the successful completion of the cold high-rate trial. Further, engineering assessment will determine the ongoing sustainability of this production increase. However, Woodside's share of LNG production decreased to 2,066 kt (2,223 kt in H1 2016) during the period, primarily due to adverse weather-related events impacting production, including a once-in-50-year rainfall event. Woodside’s share of condensate production decreased to 1.4 MMboe (1.5 MMboe in H1 2016) in line with lower LNG production. Pluto LNG’s Gap Ridge Village, a temporary worker accommodation facility, was successfully decommissioned in H1FY17. During the decommissioning process, more than 99% of infrastructure was recycled or salvaged for third-party use, while the site has been rehabilitated and will be monitored over the next 12 months, in accordance with site permit conditions.


Realised prices (Source: Company reports)
 
Continuing the strong production performance achieved in FY16: Woodside had reported 3% yoy growth in annual production at 94.9 million barrels of oil equivalent (MMboe). The company had delivered record annual LNG production of 63.7 MMboe due to the world-class LNG reliability of 98.7%. Notably, it executed major North-West Shelf (NWS) Project planned onshore & offshore turnaround ahead of schedule, and the turnaround has increased plant capacity to 16.9 Mtpa, which followed the increase from 16.3 Mtpa to 16.7 Mtpa made during 2015. The recent performance thus continues to trend from the past.
 

NPAT drivers in 2016 (Source: Company reports)
 
Stock Performance: WPL stock declined 10.2% in the last three months (as of August 15, 2017), owing to fluctuations in global commodities prices but rose about 2.5% on August 16, 2017 at the back of the latest result. Going forward, Woodside aims to focus on approvals for the drilling of high-impact wells in 2017 and 2018. We believe that Pluto expansion, progress at Wheatsone, Senegal and Myanmar are the catalysts to drive the performance in future. We give a “Buy” recommendation on the stock at the current market price of $29.90


WPL Daily Chart (Source: Thomson Reuters)
 

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