1Q18; off to a bright start
Woodside Petroleum (ASX:WPL) has released its operational activities for the first quarter ended 31 March 2018. The company reported better operational numbers for the March quarter, with Wheatstone train 1 (Woodside’s interest 13%) underpinning the quarters’ production numbers for the first time. Despite the better operational start to 2018, production guidance for 2018 remained unchanged. However, revenue for the March quarter got a real boost with both volumes and higher energy prices having a positive impact. The following table shows Woodside’s production and financial summary for the first quarter 2018: (LPG – liquid petroleum gas, LNG – liquid natural gas, boe – barrels of oil equivalent, bbl – barrels):
Source: Woodside Petroleum (ASX:WPL)
Production on a boe basis for the March quarter rose by 3.7% on the same quarter in 2017, to 22.2 million boe.
LNG production from Wheatstone LNG train 1 underpinned the result, with oil production adding to the momentum.
LNG production for the quarter rose by 12.4% when compared to the corresponding quarter in 2017, to 1.9 million tonnes. The following chart shows the company’s quarterly LNG production numbers:
Source: Woodside Petroleum (ASX:WPL)
The company produces LNG from its North West Shelf (NWS, Woodside’s interest 16.67%), Pluto (Woodside’s interest 90%) and now Wheatstone facilities. The Pluto facility reported better LNG numbers with NWS coming in flat for the quarter. The Wheatstone facility reported its first LNG numbers for the March quarter.
The company brought the Wheatstone train 1 facility on stream in the September quarter 2017, citing that operations on site have performed above expectations. Train 1 has a capacity of 2.15 million tonnes of LNG per annum. Train 2 is expected to come on stream in the current quarter which will lift annual capacity to 4.3 million tonnes of LNG. Wheatstone delivered 120,275 tonnes of LNG in the March quarter.
The NWS reported flat LNG production when compared to the corresponding quarter in 2017 of 667,332 tonnes, adding a mere 448 tonnes over the period. Field and plant operated as expected for the quarter.
Pluto on the other hand reported a rise of 8.7% on the March quarter 2017, to 1.1 million tonnes of LNG. Operational efficiencies and infrastructure availability were the key drivers of the result.
Oil is a valuable product offering, and on this front production came in higher for the March quarter. The following chart shows quarterly oil production:
Source: Woodside Petroleum (ASX:WPL)
Oil production rose by 4.5% compared to the same quarter in 2017, to 1.6 million barrels. Driving the better oil number for the quarter was the Vincent field (Woodside’s interest 60%) with the reporting of a 13.5% surge in production compared to the same quarter in 2017, to 997,242 barrels. Behind the result was a planned turnaround, infrastructure availability and improved field efficiencies.
The other oil contributors are the Enfield (Woodside’s interest 60%) and Okha (Woodside’s interest 60%) fields, and both reported lower production numbers for the quarter. The Enfield field reported an 11.9% fall and the Okha field a 5.7% fall, both compared to the March quarter 2017, to 200,035 barrels of oil and 382,432 barrels of oil respectively. Natural field declines were a key driver of the results by each field, with Okha also experiencing adverse weather events.
Condensate production for the quarter was softer, following a 1.0% fall compared to the corresponding quarter for 2017, to 2.1 million barrels. The following chart shows quarterly condensate production:
Source: Woodside Petroleum (ASX:WPL)
The main driver of the fall in production was the NWS, with Pluto picking up production and Wheatstone adding first numbers for the quarter.
The NWS focussed operations on LNG, with condensate production falling by 18.3% on the March quarter 2017, to 1.1 million barrels. On the other hand, Pluto reported a 5.3% increase in condensate production compared to the March quarter 2017, to 737,736 barrels. Wheatstone added 199,835 barrels into the March quarter numbers for the first time.
The better March quarter result did not impact on production guidance for 2018, with the company maintaining its forecast in the range of 85 million boe to 90 million boe. In 2017, the company produced of 84.4 million boe. The step-up in 2018 is welcomed with the Wheatstone facility a big driver of the added production capacity.
Given the market has been concerned around a lack of growth opportunities facing the company, near-term growth is assured with Wheatstone.
We believe the company has been constrained on this front, but in seeking out opportunities it has acted in a prudent manner.
Sales revenue for the March quarter was the real winner, enjoying both a rise in volumes for the quarter and the leverage from higher realised energy prices.
The following chart shows quarterly sales revenue:
Source: Woodside Petroleum (ASX:WPL)
For the March quarter, sales revenue surged by 30% compared to the same quarter in 2017, to US$1.2 billion. Higher volumes, as already discussed, added US$118 million to the March quarter revenue result. Higher realised energy prices added US$149 million in additional revenue for the quarter. The company reported higher LNG and oil prices over the quarter.
On its two key product offerings in LNG and oil the prices were stronger, with oil the standout. Realised LNG prices for the NWS and Pluto both rose by 30% and 3.4% respectively, with both compared to the March quarter 2017, to US$7.80 per million British thermal units (BTU) and US$9.00 per million BTU. Realised oil prices surged over the quarter, following the printing of a 21% increase compared to the March quarter 2017, to US$69 a barrel. The only fly in the ointment was domestic gas where prices declined on additional supply coming into the Australian market. Realised prices on the domestic gas front fell by 30% compared to the March quarter 2017, to US$2.60 per gigajoule.
We have a positive outlook for energy prices in 2018. We expect the Organization of the Petroleum Exporting Countries (OPEC) to remain compliant with its production ceiling of 32.5 million barrels of oil per day. Going forward, oil supplies from OPEC do look relatively contained, however circumstances can change and quickly. We are cognisant however, that US domestic oil production has breached beyond the ten million barrels of oil per day production, and will act as a constant headwind. US oil production currently stands at a 10.54 million barrels per day run rate at 13 April 2018.
On demand, we expect the synchronisation of global growth will bring with it higher demand for oil. We are forecasting West Texas Intermediate (WTI) to end the year in the range of US$70 to US$80 a barrel and Brent from US$74 to US$84 a barrel. At the time of writing, WTI was trading at US$68.79 a barrel and Brent Oil US$74.93 barrel.
Capital and exploration expenditure for the March quarter had the recent shackles released. Exploration spending rose to US$42.4 million, which represents a rise of 16.8% on the corresponding 2017 outcome. Furthermore, capital expenditure surged higher for the quarter, with the reporting of a 137% increase on the same quarter in 2017, to US$791.3. We certainly believe the balance sheet and cash flow can now support higher spending in both these key metrics.
On the development front, we believe the company will identify appropriate investment opportunities to support future growth. The likes of the Pluto expansion and both the Browse and Scarborough fields offer future growth, albeit sometime off. We will be monitoring developments on this front closely.
We see nothing in the March quarter results that would at this stage be of concern with regard to the company’s half year result to 30 June 2018 that will be released on 15 August 2018.
We continue to hold to our belief that Asia has an insatiable need for secure long-life energy supply, especially natural gas.
This energy need will, we expect, continue to generate long-term value creating opportunities for Woodside Petroleum via its long-life LNG assets especially. Moreover, a strong balance sheet matched with a robust cash flow profile delivers a financial platform capable of supporting new growth initiatives.
Consequently, we reiterate our buy recommendation for Members with no exposure to Woodside Petroleum (ASX:WPL).
Disclosure: Woodside Petroleum (ASX:WPL) is held within the Fat Prophets Mining & Resources portfolios.
