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Will Woodside ever be great?

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By Paul Rickard

News that Shell has finally quit its investment in Woodside Petroleum by selling for $3.5 billion its remaining 111 million shares or approximately 13.5% of the company at $31.10 per share is a medium term positive for Woodside shareholders. At long last, this overhang has been removed from the market.

But it is also worth reflecting that this is Shell’s third sell-down of Woodside. After having a takeover offer to buy 100% of Woodside famously rejected by the then Treasurer Peter Costello on “national interest” grounds in 2001, Shell sold its first tranche of 10% of Woodside in 2010 at $42.23 per share. It sold another tranche of 9.5% in 2014 at $41.35 per share.

That Shell is now exiting Woodside at a price 27% lower than it achieved in 2010 when the stockmarket was a whole lot lower is a reminder of just how painful the last decade has been for Woodside shareholders. While oil prices play a part in this saga, Woodside has also woefully underperformed.

In fact, Woodside has been one of Australia’s most disappointing companies. So much promise, so many expectations. I think of Woodside as Australia’s “gunna do” company - big ideas, big plans, and no execution.

And I say this not only as a current shareholder, but as someone who first bought shares in Woodside in 1978 when the North West shelf project was in the conceptual phase. My very first share purchase.

Forty years later, I am still asking the same question - can Woodside ever be great?

The Woodside Strategy

For shareholders looking for “greatness”, Woodside’s strategy paints a pretty uninspiring picture (see below). It has three horizons, with the first going out to 2021, and the third starting in 2027 (yes, in 10 years’ time!). Horizon 1 is about “cash generation” through lower capital intensity developments, exploration and expanding the LNG market. Horizon 2 is titled “value unlocked” and Horizon 3 is “success repeated”.

Woodside Strategy

To be fair to Woodside, they have been working hard on costs, margin and return on equity. At a portfolio level, production costs have fallen by 36% since 2014 - from US$7.60 per barrel of oil equivalent (boe) to US$4.90 boe in the first half of 2017 (Woodside reports on a calendar year basis). Gross margin has increased from 43% in 1H 2016 to 48% in 1H 2017, and return on average capital employed has moved into the high single digits.

However, Woodside is not exactly a growth business and production has flat lined. Last year, Woodside produced 94.9 MM boe, up 3% on 2015’s 92.2 MM boe. For 2017, Woodside has guided to produce 84-86 MM boe.

While Woodside has some growth options with Wheatstone, which has just commenced production and has the potential to produce up to 13MM boe when fully operational, the North West Shelf and Pluto are exhausting assets. Collectively, these two assets produce 94% of Group earnings before interest tax, depreciation and amortisation (EBITDA) (North West Shelf 33% and Pluto 61%). There are projects underway in Persephone and Greater Enfield, and expansion options for Pluto. The company is also exploring in Myanmar and Senegal, but the long trumpeted Browse project looks as far away as ever from getting out of the conceptual phase and into detailed design. In fact, some analysts interpret Shell’s sell-down of Woodside as confirmation that they have given up on the Browse project.

What do the brokers say

According to FN Arena, the major brokers are luke warm on Woodside and are struggling to find meaningful upside for the stock. The consensus target price of $29.90 sits at a 3% discount to yesterday’s closing price of $30.77, with 2 buy recommendations, 2 sells and 4 neutrals.

A little bit of caution is required with broker target prices and resource companies, because as long term valuations, so much depends on the forecast for the underlying commodity price. While Woodside has long term contracts for the supply of LNG, the LNG price is a function of the oil price. If the analysts are bullish on the oil price, then their target prices for Woodside will increase.

On a multiple basis, the brokers have the stock trading at 19.8 times forecast FY17 earnings and 19.9 times forecast FY18 earnings, which is high relative to its peers.  With a dividend payout ratio of 80% (which some brokers feel is too high), they forecast a full year dividend of 93.5 US cents for FY17 (A$1.23) and 95.5 US cents for FY18. This gives it a forecast yield of 4.0%.

Bottom Line

Woodside is a relatively low risk way to take exposure to the energy sector because it has some great Australian assets and the company is focused on cash generation and improving returns from existing projects. Taking Shell off the share register won’t impact the broker valuations, but will remove an overhang that could impede stock price gains if the oil price takes off.
Worth holding in the portfolio, but it is hard to see the company ever being classified in the “great” category.

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Published: Thursday, November 16, 2017

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