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Australian Stock - Woodside Petroleum


Research would suggest that Woodside is currently 20% undervalued. This would rate it as the best value of the three large Australian exploration and production  companies; the others are Santos and Oil Search.

The recently upgraded AUD 40.00 fair value estimate assumes 60% growth in annual production to 130 million barrels of oil equivalentby 2024. We don't  believe the market sufficiently credits Woodside's ability to complete  a capital-efficient second Pluto LNG train, nor its ability to increase  North West Shelf Joint Venture (NWS/JV)  life to greater than 20 years, and unfairly so.

In our opinion, the research increasingly points to growth based onthe development of new resources. The Browse Joint Venture and the progressing commercial discussions and joint technical studies  on the feasibility of NWS infrastructure processing the Browse resources. Mutual interest is likely to see the development cost favourably amortised over both assets in a two-birds-with-one-stone approach. 


Woodside was roundly criticised for completing the USD 15 billion Pluto LNG project in 2012 before it had sufficient gas to support at least two LNG trains. On a unit capital cost basis, Pluto unfortunately shares company with the likes of Chevron's notoriously expensive Gorgon project at nearly USD 3,500 per tonne. But this misses the fact that Pluto's footprint is built for two trains, with completion of a 4.4 Mtpa second train likely to cost around USD 4.3 billion—an attractive price. On this view, there is potentially more than USD 5 billion of idle capacity (sunk cost) ripe for liberation.

Similarly, on the premise of a 20 to 25 year operating life at the NWS/ JV, current reserves effectively leave one of its standard 4.4 Mtpa
trains idle, leaving somewhere in the vicinity of USD 4.3 billion of asset up for grabs on a replacement cost basis. Thus, combined with the Pluto assets, we see more than USD 9.0 billion (USD 5.0 billion for Woodside) of replacement-cost reason to bring in new gas resources to Pluto and the NWS/JV, and far more reason on the basis of
potential foregone value-add.

We view USD 9.0 billion as a sufficiently powerful motivation for affected joint-venture partners to agree on gas sourcing and usage structures. The preferred option is construction of a trunk line from Woodside's 30.6%-owned Browse gas fields to the Karratha gas plant, with a connector to Pluto. The 16 trillion cubic foot gas resource could more than comfortably support three LNG trains over 20 years, though we assume just two in our base case. Our estimated USD
10.4 billion cost to construct is not much higher than the USD 9.0 billion of value that is otherwise left on the table.



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