Morningstar | Woodside Weathers Cyclones and Marches on to LNG Expansion. No Change to AUD 46.50 FVE.
Our AUD 46.50 Woodside fair value estimate stands. We up our 2019 and 2020 Brent forecasts by 9.1% and 9.6% to USD 68.15 per barrel and USD 67.65 per barrel, respectively, in line with futures. Higher prices drive our 2019 and 2020 EPS forecasts 33% and 29% higher to AUD 2.60 and AUD 2.56, respectively. But a material proportion of Woodside’s fair value is captured in long-dated growth projects, including the Pluto/Scarborough expansion/development, muting the impact near-term Brent price has on our fair value. Our long-term Brent forecast is unchanged at USD 60 per barrel in 2021 dollars.Woodside reported a 10% decline in first quarter production to 21.7 million barrels of oil equivalent, or mmboe, in line with our expectations, despite cyclone activity disrupting operations. But higher than expected price realisation, up 1.8% to USD 65.60 per boe, saw lower than anticipated revenue decline, down just 9% versus the December quarter to USD 1.42 billion.
Our group fair value estimate equates to an unchanged fiscal 2028 EV/EBITDA of 11, or 8.1 if the USD 6.1 billion lump sum we credit for contingent resources in Kitimat Canada, Senegal and elsewhere is excluded. Our fair value credits 10-year revenue CAGR of 3.8% to USD 7.6 billion by 2028. It implies a 2028 P/E of 27, price/cash flow multiple of 23.8, and fully franked dividend yield of 3.0%, all discounted at a WACC of 9.3%. Versus today’s fair value estimate, the metrics are 11.1, 9.8, and 7.3%, respectively, more enticing.
Our forecast for 3.8% 10-year revenue CAGR is given increased validity with Woodside reporting progress across multiple contributors. Near-term, the company has completed its new truck loading facility at Pluto LNG in March, for remote power generation and transport into the Pilbara. And Wheatstone LNG began first production of domestic market gas also in March. Later this year, Scarborough and Pluto Train 2 tolling agreement negotiations are targeted for completion in second-half 2019.
And Woodside has signed a heads-of-agreement with China’s ENN Group for the sale of 1.0Mtpa of LNG from Pluto Train 2 for 10 years beginning 2025, equivalent to more than a fifth of Train 2’s likely 4.5Mtpa capacity. Gas processing agreement negotiations for the Browse to North West Shelf project are also progressing well. The Pluto/Scarborough LNG expansion underpins our assumption for 40%-plus group production growth to 130 million barrels of oil equivalent, or mmboe, by 2024. Our fair value estimate already fully credits AUD 5.00 per share for a second Pluto LNG train. The balance sheet is in good shape to undertake developments, net debt/EBITDA just 0.65 and current debt facilities with a favourable five-year average duration of which the drawn fraction has even higher 6.5-year average duration. Cost of debt is a competitive 3.9%.
Expansion timing looks to be good with market conditions pointing to a 40% increase in Chinese LNG demand by 2021. Growth is being driven by clean air policies and urbanisation while European growth is driven by rising carbon prices and declining domestic supply. Woodside notes 230Mtpa of additional LNG supply will be required by 2030, in broad step with our own views. The company plans for final investment decisions on its Pluto Train 2 and Browse gas projects in 2020, a potential key catalyst for share price appreciation to fair value.
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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