Full Year Results and Capital Raising
Profit up 18% to US$1,024m: Reduced sales volumes were offset by an improved pricing environment with both LNG and oil received prices recording strong gains. NWS LNG increased, but Pluto prices remained static which was more than likely due to long-term contract terms. Pipeline gas prices fell slightly, but improved liquids prices have had the highest revenue impact.
Operating cash flow fell 7%: Free cash flow improved 630% to US$832m. WPL’s free cash flow breakeven is US$36 above which provides a reasonable buffer against oil price volatility. If oil prices remain above US$50 a barrel or at current levels, WPL will be an even stronger cash flow generator. It was interesting to note that total production costs fell, but unit costs rose slightly. One could assume that WPL has optimised its operations as far as it can under in the current environment.
US$0.98 fully franked dividend declared: WPL is maintaining an 80% payout ratio. Peter Coleman did comment that the setting is 50% but the target is 80% and if the target was to be lowered, it would be flagged to the market well in advance. WPL announced a comprehensive development program for Browse, Scarborough and Pluto and this would need capital so there is a danger dividend may be cut in the future as the developments ramp up. This money will, however, be invested in the business to increase cash flow, which will positively impact valuation. It is better to reinvest in the business for future growth rather than return cash to shareholders as eventually all developments would need to be funded by debt or dilutive capital raises.
Forecast volumes for FY18: WPL is expecting to grow LNG volumes for FY18 which will largely be on the back of the Wheatstone Train-2 start up scheduled for June this year. Train-1 is currently running at nameplate, and the newly commissioned train will also contribute a full year to production next financial year.
Reserve replacement flat: The reserve replacement ratio is flat, but the acquisition of Scarborough will help to push it into positive territory. WPL exploration woes are well known, and it is interesting to note the head of the exploration is leaving after his contract was not renewed. Perhaps some new blood in the role may lead to some success in this area. WPL needs to organically grow its reserves going forward as the growth of reserves via acquisition is likely to become very expensive as the oil and gas market strengthens in the future as the demand dynamic for LNG improves. There has also been a historically low level of exploration around the world, and this will translate to less reserve acquisition opportunities in the future.
Scarborough Acquisition and Capital Raise: WPL has announced that it is going to acquire a further 50% of the 7.1 TCF Scarborough field from Exxon for US$444m with a further payment of US$300 on FID. This will take its share to 75%. The other 25% is held by BHP. To fund this as well as the getting Browse to FID, WPL is planning to raise AU$2.5bln from the equity market. The raising consists of a fully underwritten one for nine pro-rata accelerated entitlement offer with retail entitlements. The offer price is A$27.00 which is circa 11.4% discount to the current share price less the dividend.
WPL announces a comprehensive development for Scarborough and Browse: WPL are planning to develop the Scarborough and link the field to Pluto LNG and build a second Train to process the gas. Part of the program is to also develop the Browse field and build a 900km pipeline to the North Rankin platform to feed the Karratha Gas Plant. WPL will also build a pipeline linking Pluto with the Karratha gas plant so gas can be swapped between operations depending on supply and available liquefaction capacity. The interconnector will also allow for other fields to be developed and processed via the interconnector.
WPL has produced an impressive set of results which is not surprising on the back of a better pricing environment. While LNG markets are currently oversupplied, WPL believes the market will be in deficit from 2023 onwards justifying its development program. We think that this is a viable development option and it makes commercial and engineering sense to backfill the Karratha Gas Plant and make use of the Pluto facility to develop a second Train. We visited Pluto in 2015, and we observed there was ample room to extend the capacity of the operation. Linking the Pluto operation to the Karratha Gas Plant is a clever idea in that it will provide optionality and the chance for WPL to toll treat the third party through the plant making full use of available capacity far into the future. On the downside, the market may react negatively to the capital raise considering it represents a healthy 10% of the issued capital. Sophisticated investors would probably have preferred a reduction in the dividends paid out and a smaller raise reducing the dilutionary impact. However, Peter Coleman did acknowledge the small investors who relied on dividends, and the fact WPL needed to keep them in mind. The cost of the Scarborough and Pluto development is estimated at a gross US$8.5 to $9.7bln with WPL’s share being US$6.8 to US$7.9bln. Once complete WPL will increase the capacity of the Pluto operation from 4.7 mtpa to 8 mtpa. The cost of the Browse to North Rankin will be a circa US$15 bln (circa US$4.6bln WPL share) and further circa US$5.5bln (circa US$1.7bln WPL share) midstream development capex. WPL may need to increase debt levels to fund it’s the overall costs but these costs will be stretched out over several years and a large amount could be funded by operational cash flow.
Our view is that this development will be positive for WPL over the medium term as it increases production and provides a creates certainty regarding the future for WPL in the face of a declining resource base. There may be some short-term volatility as the market digests the cap raise but this will be short term in our view and may create a buying opportunity.
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