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 the activities undertaken by trading and shipping, the United States, Exploration, International, Canada and Sunrise Business Units. 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

Enhanced best estimate contingent resource base in Myanmar discoveries: Woodside Petroleum Limited (ASX: WPL) enhanced its best estimate contingent resource base in Myanmar given its back to back discoveries. Shwe Yee Htun (gas) field has a contingent resource (2C) of 895 Bcf dry recoverable gross gas, while the group’s net economic interest in the field is 209 Bcf. Moreover, WPL has 40% interest in Block A-6 which has a production sharing contract with Myanmar government. Therefore, the group’s profits would be dependent on realized gas prices, Myanmar government participation rights, as well as government share of profit and royalties in the production sharing contract as well as potential commercial arrangements. Appraisal drilling and testing program at Shwe Yee Htun (gas) field would be planned from 2017. As per the Thalin field 2C contingent resource reached 1510 Bcf dry recoverable gross gas wherein the group has a net economic interest of 260 Bcf. WPL has a 40% stake in Block AD-7 which is held under a production sharing contract with the Myanmar government and has similar plans and terms like Shwe Yee Htun (gas) field.
 


Shwe Yee Htun and Thalin (Source: Company Reports)
 
Maintaining strong cash flow: WPL is maintaining a strong balance sheet and a low cost production to withstand the ongoing oil prices turmoil. The group has a cash flow from operations of over 2.4 billion dollars as well as further raised 4.1 billion dollars via new and refinanced debt facilities to strengthen its capital position. The group has a gearing of 23% as of December 2015 and is targeting to fund potential growth within a gearing range of 10% to 30% and 80% payout ratio. WPL has over $1.8 billion worth in liquidity, and is expecting $2 billion by the end of 2016. The group has an insignificant near term maturities and intends to prolong maturities by end of 2017. WPL believes to maintain its competitive position and aims to deliver a free cash flow breakeven in 2016.
 


Free cash flow breakeven in 2016 (Source: Company Reports)
 
Investing in growth opportunities while decreasing spend on base business: Woodside is developing high potential projects for the coming years and slightly decreasing the focus on its core base business on the back of challenging conditions revolving the oil market. The Wheatstone Project is expected to deliver its first LNG by mid-2017 while the group installed two subsea manifolds for the Julimar Project which is on track to start from the second half of 2016. The final field of Greater Enfield project Development Plan for Production License Application for Laverda, is already submitted to the National Offshore Petroleum Titles Administrator. As per the North West Shelf (NWS) Persephone Project, the group finished the first phase of the drilling campaign while platform modifications and fabrication of key subsea infrastructure are ongoing in the project. The project is on track to start by early 2018. Meanwhile, NWS Project participants entered the FEED phase through Hess Exploration Australia to process resources from the Equus project within Hess’s permits in the Carnarvon Basin. Hess would deliver gas for processing at the Karratha Gas Plant to the NWS Project’s offshore infrastructure. On the international front, Kitimat LNG Appraisal work on the Liard basin is estimated to support the reservoir potential while the second development scale appraisal well (B-B03-K/94-O-12) was brought into production during the first quarter and generated better than estimated results. Greater Western Flank Phase 2 Project finished its transition to the execute phase and got the rest of the major contract packages. Meanwhile, the group is also pursuing options with other Browse Joint Venture participants for new work program.
 


Exploration potential in the coming years (Source: Company Reports)
 
Focusing on high potential explorations: Woodside Petroleum is enhancing its portfolio on its core oil front as well as emerging markets like LNG. The group even acquired prospective acreages in 2016 which includes Ireland and AGC1 (Senegal/Guinea-Bissau). The group is also nearing to get further exploration acreage in Gabon. WPL’s solid competencies enabled them to expand their portfolio resource inventory by 150% in the past three years despite oil prices pressure environment. The group has planned to drill high impact exploration wells during the next two years. Woodside is generating resource volumes to meet their target of greater than 120% of annual production and focusing on emerging basins and high value growth opportunities. As a result, the group intends to drill over 11 to 17 high impact wells by 2017 - 2018. Management reported that they are aiming to achieve a commercial success rate of greater than 25%, while incurring finding costs at $3/boe. Moreover, WPL is also leveraging its early mover Myanmar success via rapidly progressing towards commercialization opportunities. So they are first selecting their spending on high impact exploration for 2017/2018.
 


Project development and exploration opportunities (Source: Company reports)
 
Efficiency efforts are paying off: Woodside undertook a productivity efficiency program by the ending of 2013; and accordingly seeing the benefits from this program, the group expects an aggregate benefits of $1.9 billion by the end of 2016 and forecasts an annual benefit of $0.85 billion from the end of 2016. Moreover, management reported that over 60% of their operating cost reductions are sustainable. The group estimated a 3% to 5% increase on volume benefits for 2010 to 2013 but now forecasts an 8% supportable rise, driven by their Reliability and capacity improvements. The group made over 40% decrease in rates or contract prices via 40% cut in rig rate contract and by renegotiating more than 100 long term supply contracts. WPL even decreased marine service fleet from 3 to 2 vessels and put a new coating system to eliminate annual corrosion paint protection. The group also updated Engineering standards which led to 3% to 5% potential capex reduction. WPL also undertook other initiatives like simplifying standards and processes as well as improving automation and integrated activity planning. The group intends to achieve over $3.50/boe gas unit cost in the next three years. On the organizational efficiency front, WPL is adopting a leaner, more agile organization and expects a 23% decrease in positions for base business. WPL aims over 3,460 staff by year end of 2016 and is expecting more reductions via attrition. The group achieved more than 5,900 improvements in cultural change by 2015 and is targeting more than 9,000 by 2016.
 


WPL’s competitive edge against peers (Source: Company Reports)
 
Stock performance: The shares of WPL have been under pressure due to tough oil prices pressure and accordingly fell over 26.2% (as of May 23, 2016) in the last one year and by 9.4% (as of May 23, 2016) during this year to date. On the other hand, the group’s March quarter performance have been relatively decent on explorations front and LNG production, despite the ongoing revenues pressure due to lower average realized prices. The group made two back to back discoveries in Myanmar and discovered gas at the Thalin-1A exploration well which is intersected over 62 m of net gas pay within the primary target interval. The group also reported an annualized loaded LNG production rate equivalent of 4.8 mtpa at Pluto LNG (100% project), which is more than the estimated 4.3 mtpa average annual production capacity during FID in 2007. The group’s current credit ratings of Baa1 and BBB+ were asserted by major agencies- Moody’s and Standard & Poor’s, respectively. WPL’s charter of a 174,000 m³ LNG carrier, the fourth vessel in the fleet, would continue to boost its long-term supply from its global portfolio. WPL even made a project development agreement with Sempra LNG & Midstream to assess the potential 10 mtpa natural gas liquefaction facility in Port Arthur, Texas. Therefore, having a solid pipeline of high growth exploration activities and prospects, we believe that the group’s stock would recover from the current levels. Moreover, WPL is still among the low cost producers in the world giving them a significant competitive advantage against peers. We remain bullish on this dividend yield stock and maintain a “Buy” at the current price of $27.15
 

WPL Daily Chart (Source: Thomson Reuters)