The acquisition of the stake in Chevron’s $US29 billion Wheatstone LNG project in Western Australia is set to increase Woodside’s production.Woodside Petroleum chief executive Peter Coleman is eyeing more potential acquisitions in the depressed oil and gas sector after striking a $US3.75 billion ($4.56 billion) deal to buy Apache’s stakes in two LNG projects and a Western Australian oil field that will add future as well as immediate production.
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News of the deal, which had been rumoured in the market for several weeks, came as Woodside delayed the timing of its Browse floating LNG venture in WA, as it seeks to take advantage of the subdued services sector to cut costs at the expensive project.

Woodside will pay Apache $US2.75 billion in cash plus about $US1 billion to cover some of the US company’s sunk investment in the Wheatstone LNG project in WA and the planned Kitimat LNG terminal in western Canada.

Also included is Apache’s stakes in gas fields off the WA coast and a half-share of a huge shale gas resource in western Canada, the Australian player’s first entry into unconventional gas.

The immediate lift to production will come from Apache’s 65 per cent stake in the small but valuable Balnaves oil venture off WA, which started up in August at about 30,000 barrels a day.

Wheatstone LNG is due to start production in late 2016 and Woodside’s new 13 per cent stake will provide another step-up in LNG production after its own projects at Browse and Sunrise have been delayed.

The “blue sky” in the deal comes through Apache’s 50 per cent stale in the proposed 10 million-tonnes-a-year Kitimat export venture on Canada’s Pacific coast, which is at an early stage with no certainty of development.

The acquisition counters criticism that Woodside lacks growth in its portfolio, having last year abandoned the James Price Point LNG project in WA, while the Sunrise venture in the Timor Sea remains stalled.

Efforts to buy into growth have had mixed success with several new international exploration entries countered by the abandonment in May of the proposed $US2.5 billion investment in the Leviathan gas venture in Israel.

Mr Coleman described the Apache assets as a “natural fit” for Woodside, pointing to the rareness of the opportunity to buy a stake in a “world-class” venture such as Wheatstone.

But the deal met with a downbeat response from some quarters, with Bernstein Research analyst Neil Beveridge pointing to the risk of cost blowouts at Wheatstone and the likelihood Kitimat LNG will “struggle” in an environment of lower oil and gas prices.

“We see this as a reasonable transaction for Woodside but not significantly value accretive (at this stage)”, he said.

Woodside’s share price slid 2.8 per cent to $34.40, but its peers were also lower as global oil prices extended their dive southwards.

JPMorgan analyst Ben Wilson assessed the deal as at “a fair price but no fire sale” and estimated the Wheatstone stake could lift Woodside’s 2017 output by 15 per cent.

RBC Capital Markets analyst Andrew Wiliams said the deal “ticks some boxes but it doesn’t tick others”.

“It’s not a needle shifter per se,” Mr Wiliams said.

Significantly, both the major parts of the deal bring Woodside into close partnership with former bitter rival Chevron, which leads the Wheatstone project and is the other half-owner of Kitimat.

Under previous chief executive Don Voelte, Woodside was often publicly at loggerheads with the US energy giant. The rivalry between the two led to the separate development of the immediately adjacent Wheatstone and Pluto gas fields in the Carnarvon Basin in two competing LNG projects that many saw as ideal candidates for a single venture.

Mr Coleman said he was eager to forge new relationships with energy majors, given such links for Woodside are currently limited to Shell and BP.

Expanding those links to include Chevron “can only be a positive”, he said.

On the financial front, Woodside can comfortably fund the deal from its mounting cash reserves and existing debt. Its 80 per cent payout ratio for dividends is unaffected by the deal, as is its BBB+ credit rating.

Moody’s said that while a key ratio between cash and debt would weaken to “close to our tolerance level” in 2015, it would return to more comfortable levels the following year.

“Offsetting the negative financial impact of the transaction is the expected strengthening in Woodside’s business profile, as the acquired assets will grow production capacity for the company at a time when we were expecting limited, if any, production growth from existing assets,” the ratings agency said, while also citing increased project executive risk until Wheatstone is completed.

Construction of Wheatstone is about half complete and Chevron has flagged a budget review within the next few weeks, with wide expectations it will see some increase from its original $US29 billion price tag despite being more protected from blowouts than the US company’s larger Gorgon project, also in WA.

At Browse, where Woodside is partnered by Shell, BP, PetroChina and a venture between Mitsubishi and Mitsui, the date for a decision to start engineering and design  (FEED) work has been put back to mid-2015 from late this year.

A final investment decision on Browse floating LNG, which is expected to cost more than $US40 billion, has also been deferred, to mid-2016 from late 2015.

Mr Coleman said the delay would allow the partners to progress approvals for the project, and reach an agreement with the WA government on domestic gas supply requirements

The WA government is insisting that the Browse floating venture supply gas into the WA market alongside its LNG export plans, posing a hurdle that is yet to be overcome.

The delay to Browse came as no surprise to the market given the plunge in oil prices, which has raised doubts around the economics of the floating plan, and the absence of customers that have signed up for LNG.

“In the current pricing and capex environment and with partners having multiple supply options, we expect that Browse could be further delayed,” Bernstein’s Mr Beveridge said.

Mr Coleman said the deal “doesn’t preclude anything” in terms of future acquisitions and signalled Woodside could be interested in increasing its stake in Wheatstone should Chevron look to reduce its interest, or in other Apache assets in WA if they came onto the market “at a price that made sense” and didn’t trigger objections from the competition regulator.

Apache, which is refocusing on its North American interests, will still have several energy interests in WA, including its Harriet gas venture, and activities in the Carnarvon, Exmouth and Canning basins. It also retains its 49 per cent stake in fertiliser producer Yara Holdings.

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When it comes to the currency, it seems there is no pleasing Reserve Bank governor Glenn Stevens.
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This time last year he got traders’ pulses racing by calling for the dollar to fall to about US85c, when it was fetching US90c.

It has done that and much more since, reaching four-year lows near US82c, but Stevens remains frustrated. Last week he said he would prefer to see it trade near US75c, a level not seen for 10 years.

What’s going on?

At first glance you might think these two rare statements – it is unusual for the governor to nominate a preferred currency level – are inconsistent.

But it’s not that simple. In fact, what they really show is just how big a headache the dollar remains for the economy, even though it has fallen so sharply recently. And unfortunately for Stevens, the causes of this headache are largely out of his control, and they don’t look like fading any time soon.

So, why does Stevens remain so troubled about the dollar when it has tumbled 14 per cent in the year, even lower than the target he offered last December?

There are a few reasons, but a big one is that the importance of the United States dollar is overstated in much of the public discussion about the exchange rate.

We’ve been hearing the RBA and other economists bang on for several years about how a lower exchange rate would be good for the economy,   because it would assist exporters and businesses that compete with importers.

When they say this, it is easy to assume they are talking about the much-quoted exchange rate versus the US dollar.

But how the Aussie fares against the greenback isn’t nearly as economically significant as the media and financial markets would have you think.

The rate that matters most to the economy is the trade weighted index. That   measures our dollar against the currencies of our biggest trading partners, which are weighted according to their share of trade with Australia.

By this measure, the exchange rate has fallen much less than might be imagined.

The dollar is down 14 per cent this year against the greenback, but it has fallen only 3 per cent when measured on the trade weighted index.

The index has dipped so slightly because much of the dollar’s recent decline has been a case of US dollar strength, not Australian weakness.

Against the Japanese yen, the currency of our second-biggest trade partner, the Aussie has been rising throughout the year and last month hit its highest level in more than a year.

It’s a similar story against the euro. One Aussie dollar today buys about 66 euro cents, slightly more than it did at the beginning of the year.

Dwelling on the trade weighted index sounds technical, but the point is the dollar is doing a rather poor job as a “shock absorber” for the economy. For example, businesses exporting to Japan, or domestic companies competing with imports from Europe, are not getting much relief from recent changes in the currency.

And if ever there was a time when we needed the dollar to act as a shock absorber, it is now.

The price of our biggest export, iron ore, has crashed by 30 per cent since May, while the coal exported to power stations is down 15 per cent.

That takes us to the second reason Stevens has changed his tune and wants a US75c dollar now. National income is being crunched by plunging export prices and a weaker dollar would shield the country from some of this pain.

The government’s Mid-Year Economic and Fiscal Outlook on Monday forecast the terms of trade – export prices relative to income prices – would decline by the most since official records began in 1959.

These plunges in export prices, and the prospect of more pain, explains why Stevens has changed his tune to push for a US75c exchange rate, instead of US85c. The goal posts have shifted, because commodity prices are far lower than a year ago.

Throughout history, our dollar has tended to move in line with commodities that we export, which cushions us from swings in export prices such as these. But this relationship is much weaker now, partly because of the actions of foreign central banks.

The US has ended its US$4.5 trillion program of buying government bonds, but central banks in Japan, and to a lesser extent Europe, are pumping money (or liquidity) into financial markets in an attempt to encourage borrowing and economic activity.

The Bank of Japan is on track to add a staggering 355 trillion yen in currency and electronic money by the end of next year, while European Central Bank has expanded its balance sheet and is also under pressure to start buying government bonds.

All this money needs a home. AAA-rated Australia still looks good, despite Stevens’ protestations.

Get it? The Aussie is being buffeted by the policies of overseas central banks at a time when the biggest source of national income is plunging.

Stevens and the RBA board have a lot of power in their ability to set official interest rates, but there is only so much that will do in fighting this battle. It is little wonder he is getting frustrated.

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The Amcor paper recycling mill in Fairfield. The Amcor paper recycling mill in Fairfield.
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The Amcor paper recycling mill in Fairfield.

The Amcor paper recycling mill in Fairfield.

Delays caused by negotiations to widen the notorious Chandler Highway traffic bottleneck are putting pressure on developers of the former Amcor paper mill site in Fairfield.

Developers Glenvill and Alpha Partners were forced to resubmit draft plans for the site after VicRoads intervened mid-year, seeking to acquire a portion of the land to widen Chandler Highway.

“These unexpected and lengthy delays have put pressure on the contractual deadlines that the site proponents have with Amcor, including triggers for superlot sub-divisions and trunk infrastructure completion of certain stages by December 2015,” a council report suggests.

The Chandler Highway bridge is one of Melbourne’s main east-west Yarra River crossings and becomes snarled frequently in peak-hour traffic.

Its unpopularity with motorists prompted the newly elected Labor government to promise voters a $110 million upgrade of the bridge, with two more lanes.

Alpha Partners, run by former Macquarie bank executive Guy Nelson, and Glenvill paid $120 million to Amcor last year for development rights of the 16.5-hectare prime riverside property, which fronts Chandler Highway and Heidelberg Road.

Glenvill founder Len Warson said VicRoads’ intervention had held up the project.

“We’re in the middle of negotiations. We’re getting the land valued that they’re looking to acquire. We’re awaiting that,” Mr Warson said.

The development consortium has started to demolish the large factory on the site but will be forced to spend millions of dollars to clean up contaminated land.

The billion-dollar paper-mill project, which is one of Melbourne’s largest infill developments, will include 2720 new dwellings housing up to 4800 residents, plans show.

They also show a large retail centre with 20,000 square metres of floor space for supermarkets and speciality retailers. That is much larger than originally proposed, which has prompted a council review of its suitability as a neighbourhood activity centre.

The site will also house 12,500 square metres of office space, documents show.

Other key proposals include:

An integrated community facility and 80-place early learning centre.

A 180-place prep to year 2 school.

5 per cent of housing (135) for affordable homes.

4.5 per cent of the site for a new riverside park, an industrial heritage plaza, two parks and a piazza.

There are doubts about funding for the school and affordable housing proposals and they might not be developed.

Nearby, work has started on the four-stage Hemingway project, which will turn a 9160-square-metre site on the corner of Perry Street and Heidelberg Road, formerly the run-down Jika International Hotel, into multi-level luxury homes.

The $47.5 million, 55 two- and three-bedroom townhouses developed by Tim Gurner sold within weeks.

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Woolworths will roll out a new convenience concept store at 160 Swanston Street. Woolworths will roll out a new convenience concept store at 160 Swanston Street.
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Woolworths will roll out a new convenience concept store at 160 Swanston Street.

Woolworths will roll out a new convenience concept store at 160 Swanston Street.

Retail heavyweight Woolworths has made its first land grab, as it rolls out its new convenience store strategy in Melbourne.

The retail giant has signed up for two CBD locations on Swanston and Flinders streets for the scaled-down stores, prompted by a wave of new apartment and office-block-conversion dwellers living in the central city.

Woolworths will roll out a new convenience concept store at 160 Swanston on a gross rent believed to be around $2030 a square metre in a deal negotiated by Allard Shelton’s Patrick Barnes and CBRE.

Another deal is understood to have been negotiated by Colliers International for 700 square metres at 262 Flinders Street in a space occupied previously by an IGA store.

The fully fitted shop has links to Melbourne’s famed Degraves Street.

Woolworths was coy when asked about its strategy to take over smaller city retail spaces.

“Our stores vary in size and are designed to best meet the needs of the community they serve,” was all a Woolworths spokeswoman would say.

Last week it opened a small concept store at 302 Elizabeth Street in Sydney.

It was modelled on another in Crown Street, Woolloomooloo, the original template for the Woolworths Small Format branded corner-store push.

The supermarket behemoth plans to ramp up its rollout in both cities with stores that offer a limited range of products and act as feeders for its medium-line Woolies Metro outlets like the one in Melbourne’s Southern Cross Station.

Agents say the group is looking for multiple sites between 200 and 400 square metres in size.

Woolworths and competitor Coles regard central-city neighbourhoods as big growth areas.

Their push to cater for the shopping needs of city dwellers has followed the rapid expansion of another Sydney-based convenience store chain and competitor, EzyMart.

EzyMart will open its fifth Melbourne store this year, after signing a lease on the corner of Queen and Little Collins.

Savills Australia’s Michael Di Carlo said new store followed the success of its other CBD offerings.

“EzyMart is very well established in Sydney and is now making its presence felt in Melbourne, with several recent store openings,” he said.

The push by the big retailers is likely to hurt traditional smaller-format operators like 7-Eleven and IGA and comes amid concerns from suppliers about the large retailers’ misuse of market power.

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