Is Australia’s biggest oil and gas company turning into an annuity play, or does it remain a compelling growth story?
A fortnight out from its annual meeting in Perth, Woodside Petroleum remains locked in talks to cement a farm-in into the massive Leviathan gas field off Israel that is supposed to deliver its next step-change in growth.
While Woodside and Israel’s Government slug it out over the tax treatment of the Perth company’s proposed $US2.6 billion farm-in, Leviathan’s partners are getting ever closer to a final investment decision on a staged development of the 19 trillion cubic feet gas resource.
This week, the Leviathan partners submitted a plan to Cyprus’ Government to send pipeline gas to the island nation, starting as early as 2016. The timetable is not dissimilar to the proposed start-up of Israeli domestic gas deliveries that will underpin Leviathan’s development.
Big gas projects such as Leviathan or the Woodside-led Browse floating LNG development, which is the basis of design stage ahead of a move into front-end engineering and design work in the second half of this year, are risky, capital intensive and long-term propositions.
Woodside chief executive Peter Coleman has made clear in his near-three years in the job the company will not rush into new mega-projects, and that it has heeded institutional investors’ appetite for cash returns rather than a relentless focus on growth.
Last year, Woodside announced a dividend payout policy of 80 per cent of underlying net profit “for the next several years”.
The move, which won instant applause from investors, was also immediately seen as a go-slow on pursuing a transformational development like the $15 billion Pluto LNG project, which shipped first cargoes two years ago. Woodside denies a go-slow.
Woodside chairman Michael Chaney, who is up for re-election for a final three-year term at Woodside’s AGM on April 30, told the Australian Petroleum Production & Exploration Association conference in Perth this month that Pluto had changed the company’s mind set.
“With hindsight, our initial project planning had some short-comings, including that we were far too optimistic in our scheduling and productivity assumptions,” he said. “This increased the complexity of execution and resulted in quite significant cost overruns and schedule extensions. Late in the project, having taken stock of the situation, we concentrated on one single objective: achieving a flawless start-up even if that entailed more cost and further delays.”
Pluto’s development cost 25 per cent more than budgeted and was a year late.
Woodside’s eight-page March quarterly, released on Thursday, was a steady-as-she-goes report card. The quarterly was also half the size of that lodged by Santos on the same day. Size should not matter but it helps illustrate the different positions Australia’s two biggest oil and gas companies find themselves in.
While Woodside is enjoying Pluto’s cash flow and scouring the world for exploration opportunities, Santos should receive first returns from the ExxonMobil-led PNG LNG project this year and is finishing its Gladstone coal seam gas-fired LNG venture, due to be ready next year. Santos also has a big near-term development program in WA and South-East Asia, which combined with the two LNG projects should transform the Adelaide company.
Big execution risks remain and Santos investors are nervous, akin to Woodside’s position in 2010 as Pluto neared completion.
If Santos slips again during the execution phase, Woodside investors will gladly reflect on their own company’s annuity-style payouts. But they will also ponder what the long term holds for Woodside.