Continued weakness in liquefied natural gas (LNG) markets has left Woodside facing a number of issues for its development projects, Scarborough and Browse, with internal rates of return that only just meet appropriate hurdle rates. CEO Peter Coleman’s recent assertion that the company would proceed with the projects despite the current weak prices likely means these assets will generate only low-double-digit returns, with the participants still bearing all the construction and development risk.
Woodside has encountered delays in the sell-down of Scarborough and Pluto T2, and in the finalisation of gas agreements to underpin Browse as backfill gas through the Karratha Gas Plant. There is now some urgency to the process given the small window of opportunity in the market until the next wave of LNG capacity growth. Furthermore, spare capacity is expected to open up from 2023 or 2024, and failure to get the projects off the ground would likely mean trains would need to be shut down.
In our view, the marginal returns from these assets are hampering the company’s ability to convince its joint-venture partners to proceed, and this is likely causing delays in the pre-final-investment-decision schedule. The risk is that one or both projects are shelved indefinitely.
Notwithstanding the issues Woodside is facing with its development projects, we consider the stock expensive relative to its peers. Based on our estimates, Woodside is trading at a higher price to net present value ratio than the rest of our energy sector coverage, which we see as due partly to its 5.5–6.0% dividend yield. This could continue to support the share price, although we note Scarborough has already been funded through an equity raising, and we see the potential need for further capital to drive Browse and other growth projects.
With the shares trading above our target price, we recently downgraded our recommendation to Lighten from Hold and lowered our target price to $33.85 from $34.60.