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.
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.