Wheatstone 2 adds to an improving outlook
Woodside Petroleum (ASX:WPL) will soon report its second quarter operational result to 30 June 2018, and we expect the momentum seen in the first quarter will be a key feature. Liquid natural gas (LNG) will again be the mainstay with the Wheatstone 2 (Woodside’s interest 13%) start-up swelling production. Wheatstone is a good example of the company’s patient approach to building its future growth profile, as it targets 100 million barrels of oil equivalent (boe) by 2020. The following figure shows the location of the company’s operations:
Source: Woodside Petroleum (ASX:WPL)
The company produced 84.4 million boe in 2017, and hit a peak of 95.1 million boe in 2014. The 100 million boe target is certainly, we believe, achievable.
First to Wheatstone 2, and the company announced in June that Train 2 had commenced commercial operations.
The company brought its 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. Wheatstone delivered 120,275 tonnes of LNG in the March quarter 2018. Wheatstone 1 has been a success for the company, with production running at above its annual nameplate capacity.
Train 2 is now on line and when at full capacity will produce 2.15 million tonnes of LNG annually, and lift total LNG capacity for the facility to 4.3 million tonnes per annum. Given the success of Wheatstone 1, the 4.3 million tonnes capacity is likely to be surpassed. Pluto (Woodside’s interest 90%), when at steady operational status exceeded its annual nameplate capacity.
Turning to the daily chart, prices have accelerated sharply since the March lows. Prices have now pushed above a layer of resistance at $35.96 being the 61.8% Fibonacci retracement. The existence of a bullish crossover, where the 50 day moving average (red line) cross the 200 day moving average (green line), in April, is also a positive development.
Turning now to growth, the company did at a recent Investor Day map-out its development plans near-term and longer. Out to 2020, the company expects to hit 100 million boe through three developments. Wheatstone is forecast to deliver 13 million boe in 2020, with workover activities in the North West Shelf (NWS, Woodside’s interest 16.7%) forecast to add 10 million boe and the Greater Enfield field (Woodside’s interest 60%) 10 million boe. Both the NWS and Enfield projects are brownfield developments while Wheatstone is a greenfield development.
The Scarborough field (Woodside’s interest 75%) will play a major role in the company’s future growth. The following figure shows the Scarborough field location and a proposed link to the Pluto platform and then onto the Karratha LNG facility:
Source: Woodside Petroleum (ASX:WPL)
Members will remember that the company recently (back in February 2018) completed a capital raising of A$2.5 billion in a one (1) for nine (9) share issue at A$27.00 per share. Part of the funds raised would fund the acquisition of a further 50% interest in the Scarborough field. We covered off on the Scarborough acquisition in FAT-AUS-862.
The Scarborough field hosts a resource of 7.3 trillion cubic feet of natural gas and carries an US$11 billion development price tag. The Scarborough field will produce in the range of 11 million to 14 million tonnes of LNG production per annum. A further benefit and as Members can see from the previous figure that the trunkline to the Pluto platform will allow the company to assess other fields that lay adjacent to that line, commonly termed “tie-in” opportunities. As a note, Pluto cost US$17 billion to develop and produces 4.7 million tonnes per annum of LNG.
Scarborough is a significant step-up on Pluto on two fronts, with a lower capital cost and higher rates of production and therefore it will generate higher margins. Scarborough looks assured, with front end engineering and design (FEED) activities expected to get underway in the March quarter 2019 and a final investment decision in 2020. Scarborough upstream is expected to be ready for start-up in 2023 and down-stream in 2024.
The much discussed development of the Browse field (Woodside’s interest 30.6% appears to now be taking form. The following figure shows a concept of how the Browse field will be developed:
Source: Woodside Petroleum (ASX:WPL)
Browse carries a resource of 13.9 trillion cubic feet of dry gas and 390 million barrels of condensate. The field is expected to produce annually 10 million tonnes of LNG and liquid petroleum gas, 1.4 million tonnes of domestic natural gas and 50,000 barrels of condensate. The project is expected to carry a capital cost of US$20.5 billion. FEED activities are expected to get underway in the December quarter 2019 and FID in 2021. Both the Calliance and Brecknock fields are forecast to be ready for start-up in 2026 and Toroso in 2027.
Woodside’s growth profile was a concern that we had, but the company has now we believe addressed that concern, by coupling its financial strength with projects that will carry its growth beyond 2030.
With reference to the monthly chart, prices have entered a bullish phase of the overall technical cycle with a recent high of $36.10. We now envisage a broader upwards rotation towards resistance, located at the 78.6% Fibonacci retracement of $39.34 (red set of retracements).
We expect to see nothing in the June quarter operational results that may negatively impact on the company’s half year result to 30 June 2018.
Energy prices could again be a very welcome tailwind. The results 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 that remains unchanged.
The following figure shows the company’s interpretation of IHS Markit’s outlook for the Asian region:
Source: Woodside Petroleum (ASX:WPL)
Satisfying Asia’s energy needs will, we expect, continue to generate long-term value creating opportunities for Woodside Petroleum, especially via its long-life LNG assets. Moreover, a strong balance sheet matched with a robust cash flow profile delivers a financial platform capable of supporting new growth initiatives.
We have questioned in the past the company’s growth profile, or lack of, but now consider it has built up a portfolio to hit 100 million boe by 2020. Importantly, the company’s approach has been patient and lacked a cash splash.
We believe the company is now in the best position financially to forge ahead with its proposed developments.
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 portfolio.
