David Walker, Senior Analyst, Clime Investment Management

Third (September) quarter production recovered strongly from the June quarter, when the Pluto LNG gas liquefaction facility was closed for maintenance including the unplanned extra fortnight caused by problems restarting its mixed refrigerant compressor. Pluto LNG achieved record daily production of 15.3kt/d and record quarterly production of 12mmboe (100%), and the Greater Enfield oilfield began production in August. Total 3Q production was 24.9mmboe (million barrels of oil equivalent), up 44% from 17.3mmboe in 2Q (the June quarter). WPL maintained its 2019 production guidance for 88-94 mmboe and is progressing towards its near-term production goal of 100mmboe in 2020.

Figure 1. Recovery in production in 3Q

Source: WPL

The market was concerned – overly so, in our view – the extra fortnight’s outage at Pluto could mark the end of WPL’s previous longstanding excellent reputation for consistent and reliable operations. This was one reason for the decline in the share price in July and August. Pluto’s recovery to record quarterly output in 3Q should reassure the market.

Average price realisation was higher than 2Q, with an average boe selling price of US$50 compared with US$44 in 2Q. Pluto and Wheatstone LNG prices were higher than 2Q due to the three-month lag in Asian LNG pricing from Brent oil, which rallied to over US$69/barrel in 1Q (the March quarter). Sales revenue bounced 58% from the subdued 2Q.

Figure 2. Improved September quarter LNG pricing due to oil price strength in the March quarter

Source: Macquarie Research

Figure 3. Better realised pricing in the September quarter due to the March quarter’s oil price rally

Source: WPL

WPL updated the market as follows on timelines for development of its growth options:

  • Project FID (Final Investment Decision) for the Pyxis Hub was taken in August. This project links the subsea Pyxis, Pluto North and Xena 2 wells to the Pluto offshore platform to support feedstock volumes to the Pluto LNG plant and the North West Shelf (NWS) project via the Pluto-LNG interconnector
  • FID for the Scarborough gasfield is targeted for 1H20 (unchanged). The expected deal on terms to process gas from the field through Pluto LNG, which WPL manages, is expected by the end of CY19, feeding into the decision by BHP due by 31 December on whether to exercise its option to increase its stake in Scarborough from 25% to 35%. This would in turn allow WPL to resume work selling down its own stake in the field to a third party like an Asian energy utility. WPL CFO Sherry Duhe said a deal to bring in another partner to Scarborough should be done about the same time as FID in 1H20. She was quoted in the media describing interest from potential partners as “incredibly high. They see that we’ve got great projects, competitive costs and we’re at the right time of the cycle.”
  • The Browse gasfield is ready for FEED (Front End Engineering & Design) this quarter (unchanged). A final deal still needs to be struck to process Browse’s gas at the North West Shelf venture, with negotiations ongoing since last year. Such a deal involves Browse partners Shell, BP, PetroChina and Japan Australia LNG, as well as other North West Shelf partners including BHP and Chevron. WPL’s CFO said “the fact that we are holding firm [on the Q4 target] hopefully gives you confidence about how we are feeling about that. I see the Browse partners and the non-Browse partners moving and we’re working very constructively together on that and we are all committed: it’s time to move on and it’s time to move into FEED.” Browse FID was however delayed to 1H21 from 2H20 but the CFO said this didn’t change expectations it would start production in 2026-27.
  • FID on the Senegal oil project is targeted for this quarter. Internal technical, cost and schedule reviews are nearly complete.

We expect further updates on commercialisation, volumes, pricing and costs at WPL’s 19 November investor day, which we will attend.

Fossil fuel producers face increasing pressure from investors to offset the carbon emissions from extracting and burning their fuels. WPL has signed a heads of agreement with Greening Australia to plant native trees to sequester one million tonnes of CO2 over 25 years.

WPL has underperformed since June due to the bear market in crude oil, its high LNG exposure during weaker LNG pricing, a disappointing 1H19 result, scepticism Scarborough is viable when LNG prices are this low and BHP is slow or reluctant to approve the project, disillusionment with the complex protracted negotiations between the various joint venture partners and entities in WA’s LNG industry, stronger results and more diversification at global hydrocarbon peers, and capital management policy uncertainty. However the stock is now pricing in not much more than output from the current base business at today’s depressed LNG prices into perpetuity. In other words, the share price is pricing WPL as ex-growth and facing lower LNG prices forever. In this scenario we think the stock’s downside is limited to $30.

We see $5-10 per share of upside if growth plans come to fruition and market conditions improve long-term. Recently we downgraded adopted NROE from 12.5% to 12.0% to reflect the current softness in oil prices, which lowered our FY20 intrinsic valuation to $36.40 at the current USD/AUD exchange rate (the valuation varies daily with the exchange rate). Our valuation assumes a Brent oil price of US$65/barrel in 2020 rising to US$70/barrel in 2021, development of Scarborough and Senegal but not development of Browse nor the Pluto-NWS interconnector. We think this valuation is conservative, given Browse and the interconnector are likely to face delays longer than Scarborough and Senegal, but not overly so. If Browse and the interconnector were to proceed the stock could be worth $41 at a US$65-70 Brent oil price.

We expect Brent will improve to an average US$65/barrel from ~US$59 currently because US shale oil output is now growing more slowly, at 0.85 million barrels per day compared with 1.4mbpd earlier this year, as the sector responds to the fall in US oil prices since April and reduces rig counts. For us to become more bullish on oil, US production growth would have to slow to, say, 0.6mbpd and global demand would have to grow sufficiently to absorb the potential return of OPEC’s production cuts and Iran’s currently sanctioned export volumes.

We remain comfortable with our 2.4% WPL weight in the Clime Direct Model Portfolio. This is above the stock’s 1.7% weight in the ASX 200, reflecting the value we see in the stock, the current pessimism in oil and LNG markets and our confidence WPL will operate and produce smoothly while it delivers on enough growth options for the share price to rise to our valuation.



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