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

Acquisition of ConocoPhillips’ interests in Senegal: Woodside Petroleum Limited (ASX: WPL) has entered into a Purchase and Sale Agreement (PSA) with ConocoPhillips to acquire all of ConocoPhillips’ working interests (35%) in Senegal for US$350 million, plus a completion adjustment of about US$80 million. The Purchase and Sale Agreement is expected to close by 2016 end after satisfaction of customary conditions, including Government of Senegal approval. ConocoPhillips Senegal B.V. has working interest in a Production Sharing Contract with the Government of Senegal for the three offshore exploration blocks, Rufisque Offshore, Sangomar Offshore and Sangomar Deep Offshore. The acquisition would provide the option for Woodside to operate the development of any resource in the future. Moreover, the contract includes the SNE, one of the largest global deep water oil discoveries since 2014 and FAN deep water oil discoveries. WPL estimated that the SNE discovery contains 560 MMbbl of recoverable oil (at the 2C confidence level, 100%). Australia's FAR Ltd owns 15% of the fields and Senegal's state-owned Petrosen holds 10%. This acquisition would give WPL the significant position in an underexplored and highly prospective emerging oil province and would leverage its expertise in deep water drilling, development and operation of subsea infrastructure and floating production storage and offloading vessels.
 

Discovered oil resources within regional focus area (Source: Company Reports)
 
Approval of Greater Enfield Project development: Greater Enfield Project has been approved for development wherein the group along with Mitsui E&P Australia has a joint venture with the total investment for the project over US$1.9 billion (about US$1.1 billion Woodside share). The first oil from the venture is expected in mid-2019. The project would develop the Laverda Canyon, Norton over Laverda (WA-59-L) and Cimatti (WA-28-L) oil accumulations and would also develop six subsea production wells and six water injection wells.
 
Exploration Potential: WPL has reported an increase in its exploration potential with the estimate of contingent resource by 83 MMboe to 4,481 MMboe of the two offshore gas discoveries of Myanmar in Q1 2016. The company has achieved an annualized loaded LNG production rate equivalent of 4.8 mtpa at Pluto LNG (100% project) which is more than the expected annual production capacity of 4.3 mtpa. Meanwhile, Woodside Energy Trading Singapore Pte Ltd has signed a Heads of Agreement (HOA) with PT Pertamina (Persero) for the supply of about 0.5 to 1.0 million tonnes of LNG per annum from Woodside’s LNG portfolio for a period of 15 to 20 years (commencing in 2019). Moreover, Woodside’s exploration of four to seven wells is expected to start in early 2017. The company's 2017 drilling program off Myanmar would accelerate options for commercialization.
 

Strong resources indicating visibility (Source: Company Reports)
 
Development Activities: The development activities in the next two years includes Browse development after the completion of FEED work. WPL is committed to the earliest commercial development of the world-class Browse resources and to FLNG as the preferred solution. The Wheatstone Project Operator is targeting the first LNG in mid-2017. For Greater Enfield Development, the expected FID is by mid-2016. The Persephone Project in NWS is expected to start in early 2018. The Greater Western Flank Phase 2 Project has reached to the execute phase. In Lambert Deep, FEED activities are being finalized for a final investment decision in the second half of 2016. The NWS Project participants have entered the FEED phase with Hess Exploration Australia to deliver gas to the NWS Project’s offshore infrastructure for processing at the Karratha Gas Plant.  Kitimat LNG project would further confirm the world class Liard basin resource. Myanmar would have early development of both discoveries and further exploration.
 

Development Plan (Source: Company Reports)
 
Major Cost Reduction: WPL is targeting weighted average unit of cash cost of sales to be down 10% in FY 2016 and has reduced 35% cost from two years to FY 15. Moreover, WPL’s unit production cost is less than average peers. WPL has reduced 40% of the price through 40% reduction in rig rate contract and renegotiation of 100+ long term supply contracts. WPL’s base spending is trending down as the Browse and Kitimat investment are through the front-end phases. WPL’s level of exploration investment is consistent with peers. Meanwhile, WPL has low cash flow break-even which reflects the asset quality, low production cost and low sustaining capex.
 
 

Unit cash cost of sales and production costs (Source: Company Reports)
 
Support from Balance Sheet: WPL has a gearing of 23% as on 31^st December 2015 and is well positioned to fund growth within target gearing range of 10%-30%. Moreover, WPL is targeting $2 billion liquidity by end of 2016 and to fund the exploration activities raised $4.1 billion in 2015 due to strong debt market support. WPL has pre-tax portfolio cost of debt 2.9% p.a. and has plans to further extend maturities by end 2017. Meanwhile, WPL has been gaining attention despite the turmoil in the oil & gas market on the back of its long-life business model, earnings stability and strength of offtake arrangements. WPL has flexible balance sheet with minimal near term maturities.
 
Market Opportunity for the Group: There is a short to medium-term oversupply for LNG, but supply shortfall would start developing from 2022 onwards, driven by growth in emerging markets. For this the new supply sanction would be required from 2018 to meet the demand, and on average, sanction of additional ~20 Mtpa capacity would be required annually. Therefore, price recovery is expected from 2018 with the requirement for sanction of new supply. WPL is well placed to meet the demand as the company is discussing sale or rollover of mid-term for 8-10 cargoes in each of 2017 and 2018. Meanwhile, there is robust Wheatstone gas pricing and the two HoAs are in place for long-term portfolio sales. In addition, WPL has completed 11 price reviews in principle in 2015/16 with robust oil linkage and near US$65 million to Woodside in reconciliation payments to be received in 2016.
 

New supply sanction needed from 2018 to meet the potential demand (Source: Company Reports)
 
Stock Performance: The shares of Woodside Petroleum Limited fell over 21.79% in the last one year (as of July 19, 2016) and lost over 8.05% during this year to date on the back of turmoil in the oil & gas prices. Accordingly, WPL has been positioning itself to withstand this pricing pressure to their topline. For Browse project, the group delivered over 40% cut in cost of supply from the onshore Kimberley concept. Even for the Kitmat project, the group delivered over 20% reduction in cost of supply from acquisition via innovation and technology. Woodside Petroleum is planning to generate 2.4 Bboe of growth projects in the next decade. Greater Enfield FID is targeted for mid-2016 while Myanmar appraisal drilling is expected from the first half of 2017. Browse project is expected to finish the concept selection by second half of 2017. Kitimat project is estimating LNG demand window in mid-2020. On the other hand, the stock started recovering in the last six months and generated over 4.2% driven by the recovery in the oil prices. We believe Woodside Petroleum has more potential for upside, and has a significant competitive edge as compared to its peers. The stock also has a decent dividend yield. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $27.34
 

WPL Daily Chart (Source: Thomson Reuters)

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