And Australia, already becoming the world’s largest supplier of...

And Australia, already becoming the world’s largest supplier of liquefied natural gas, is in the box seat to take market share in China if trade tensions between the US and China deteriorate to the point where Beijing looks away from the US for LNG imports.


Woodside is ex-growth unless it can profitably develop its Scarborough, Senegal, Browse and Sunrise assets. Total production from existing fields can grow until 2020 but declining reserves will eventually weigh on annual production. This is the eternal disadvantage of the upstream resource stock: its assets continually deplete due to the production which earns the revenue, pays the bills and funds dividends. Resource companies often end up having to raise equity or retain more earnings to fund acquisitions or development of new reserves, which then deplete and start the cycle again. Returns on equity are typically ordinary given the capital intensity of mining, processing and distribution.

This explains the $2.5bon equity raising, which funded the acquisition of additional interests in the Scarborough, Thebe and Jupiter gas fields off the WA northwest coast. Woodside now owns 75 per cent of Scarborough. Together these fields have contingent resources, which means gas not yet proven as profitable to recover, of 9.2 trillion cubic feet of dry gas. Woodside’s total contingent resources increased by 11 per cent after the acquisitions. Now that the company is the majority owner and operator of Scarborough, the strategy would be to monetise the resource by processing the gas at its Pluto plant.

The industrial logic of the acquisitions is sound given the market opportunities for LNG and Woodside’s need to replace declining reserves. It is more the size, timing of and need for the equity raising we question when the dividend payout ratio is 80 per cent.

The 1-for-9 raising was at a dilutive 11 per cent discount to the last close and not surprisingly triggered earnings-per-share downgrades of 7-9 per cent over 2018-2020; that’s the story behind the recent slide in the share price.

There is a great deal of ‘‘trust us’’ in backing a company without an explicit need for all the $2.5bn of equity just raised. In Woodside’s favour is the pace at which the Chinese LNG story is improving and the company’s relatively clean stewardship on mergers and acquisitions. One possible use for the surplus equity is more M&A, and we would not rule out a counter bid for Santos but, unlike other resource majors, Woodside does not have a record of torching billions on failed acquisitions.

Woodside’s record of developing and operating projects is strong and, crucially, there have been few significant downgrades to reserves.

The 2018 forecast dividend yield of 5 per cent fully franked is an attractive and legitimate part of the thesis but investors should be cautious on the dividend from 2020 onwards, when growth capital expenditure ramps up.

Either way, it will be many years before the equity raised earns its full returns. Final board approvals for Browse and Scarborough are not due until 2020 and 2021 with production and returns four to five years later. Unless investors are happy holding an oil and gas stock through eight years of oil price volatility, they need a shorter-dated thesis for owning Woodside now.

One source of downside is a likely change to the petroleum resource rent tax. Woodside and its peers will eventually pay large PRRT once they have recovered the capital costs of their LNG expansions but the government could bring these payments forward. We await the May federal budget with interest.

David Walker is ASX large-caps portfolio manager at Clime Asset Management.
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