Boarding the Pluto Train

In March, with oil prices declining rapidly, most companies across our coverage took steps to address cash outflow. Woodside Petroleum deferred the Browse backfill project indefinitely and delayed final investment decision on Scarborough and Pluto Train 2 by 12 months.


With Brent crude prices now more than 30% higher, the situation has clearly changed. We believe the current environment is far healthier for growth, and we have reintroduced the Pluto Train 2 expansion project into our forecasts from 2025 and brought Browse forward to 2027.


The inclusion of growth into our model has implied in a lift in capital expenditure, and we now estimate gearing will rise from 9% at December 2019 to a peak of 35% by December 2024. Woodside still has the option to divest assets, including selling down Pluto Train 2. This asset has potentially risen in value with benchmark interest rates now lower.


The AFR reported on 23 June that Woodside may utilise pre-emptive rights to purchase Chevron Corporation’s stake in the North West Shelf joint venture. Based on our valuation of Woodside’s stake in the asset, we estimate Chevron’s 17% interest could be worth US$3.0–3.5bn. It could have a marginal impact on the company’s overall net present value, based on our assumption that it would pay full value for the assets, although it would have little effect on gearing with increased near-term free cash flow offsetting the upfront payment.


We have made some changes to the timing and delivery of growth projects, which have generally had a positive impact on our valuation. Our near-term earnings estimates have reduced slightly due to higher debt and finance costs.


We now have greater confidence around the balance sheet, and options to divest and/or acquire assets in the north west of Western Australia. We have upgraded our recommendation on Woodside to Buy from Hold and raised our target price to $26.50 from $25.50.

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