Morningstar | No-Moat Woodside FVE Upgraded 12% on Pricing. Progress on Pluto T2 and Browse Agreement Lend Comfort
We increase our fair value estimate by 12% to AUD 45 per share on higher near-term energy prices and the time value of money. While our midcycle Brent price forecast is unchanged at USD 60 per barrel (2021 real), our forecast average for the four years to 2021 is increased by 10% to USD 70.80 per barrel. At AUD 34.50, no-moat Woodside shares remain materially undervalued, we think the market insufficiently pricing for LNG growth potential. And this before brown-field gains, including construction of the Pluto LNG truck loading facility, begun in April this year. The facility will distribute LNG to Pilbara customers from 2019 from a debottlenecked Pluto Train 1 designed to take capacity from existing 4.8Mtpa to around 6.0Mtpa. Pluto in its current one-train-only configuration comprises 50% of our group fair value estimate; brownfield gains matter.Woodside reported marginally lower than expected second-quarter 2018 production, steady at 22.1 mmboe, with maintenance at the North West Shelf JV and Vincent only partially countered by near record-equalling Pluto LNG output. Sales revenue fell 8% to USD 1.1 billion, with higher average product pricing offset by an inventory build of just over a million barrels. These are timing issues only with no fair value implication. More importantly, Wheatstone's second LNG train is ramping up as planned, and the proposed Scarborough gas resource development in support of a second Pluto LNG train is being accelerated to ready for startup status by as soon as 2024 with second train capacity increased to 4.0-5.0Mtpa. We hold at 4.5Mtpa, that second train comprising AUD 5.00 per share or 11% of our group fair value estimate.
Pluto expansion is attractive given reduced capital intensity on the existing infrastructure footprint, which we estimate will help returns on invested capital to recover to a WACC equalling 9.3% and above by 2025, though not sufficiently so to warrant a change to our no-moat rating.
Elsewhere, Woodside reports a preliminary tolling agreement for processing Browse gas through the North West Shelf JV is slated for as soon as the September quarter. Alignment has reportedly been reached which circumvents the need for equity unitisation across the projects. Woodside has a one-sixth stake in the North West Shelf and a around 30% stake in Browse. But as discussed in our Woodside special of December 2017, the North West Shelf will be short gas without Browse, providing the company with leverage. On the premise of a 20 to 25-year operating life at NWS/JV, current reserves effectively leave one standard 4.4Mtpa train idle; the NWS needs Browse. We value Woodside's combined equity share of Browse and NWS/JV at AUD 11.50 or 25% of total. Without Browse agreement, our base case group FVE falls by AUD 2.60 or 5%.
With our near-term Brent price forecasts upgraded, and our anticipated LNG price achievement now circa USD 10 per million British thermal units, or mmBtu, versus recent sub-USD 8 lows, we anticipate free cash flow for Woodside of USD 1.2 billion in 2018 and USD 2.6 billion in 2019. That compares to USD 825 million in 2017 and is supportive of maintenance of the 80% dividend payout ratio for some considerable time yet. Our 2018 and 2019 DPS forecasts of AUD 1.72 and AUD 2.00 respectively equate to handy 5.0% and 5.8% respective fully franked yields at the current AUD 34.35 share price, and that in a growth stock. Woodside is conservatively leveraged with sub 20% net debt/equity and net debt/EBITDA set to fall below 1.0 before year's end.
Woodside Petroleum is engaged in hydrocarbon exploration, evaluation, development, production and marketing. Co.'s operating segments include: North West Shelf Project, which 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; Pluto LNG, which is engaged in the exploration, evaluation, development, production and sale of liquefied natural gas and condensate in assigned permit areas; Australia Oil; Browse FLNG; and Wheatstone LNG. As of Dec 31 2015, Co. had proved reserves of 1.15 billion barrels of oil equivalent.
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