A Reduction of Woodside’s Stake in Browse LNG Project Would Be Credit Positive

A Reduction of Woodside’s Stake in Browse LNG Project Would Be Credit Positive

On 27 January, Woodside Petroleum (Baa1 negative), Australia’s largest independent exploration and production company, announced that it is considering selling a portion of its 46% interest in the Browse LNG development. A reduction of its stake in the massive liquefied natural gas (LNG) project would be credit positive for Woodside as it would reduce its exposure to this single large development project. In addition to the proceeds Woodside would receive, a reduction in ownership reduces Woodside’s project execution risk.

Since the arrival of a new CEO in May 2011, Woodside has adopted a more conservative approach to new investments. The company has suggested that its large equity stakes in its pipeline of projects (see exhibit) provides it with various options, including selling down its stake in the projects. The announcement that the company is looking at selling down a portion of its equity in Browse fits the company’s strategic shift to a more conservative and credit friendly approach toward developing large LNG projects.

Woodside’s Large Pipeline of LNG Projects

In addition to having a more conservative management team, this shift is likely the result of the hard lessons learned developing the AUD14.9 billion Pluto LNG project, of which Woodside currently owns 90%. By mostly going it alone on the Pluto project, Woodside carried almost all of the execution risk of a project that has experienced several setbacks, which has delayed production start-up by over a year and is costing the company an additional $2.9 billion, or 24% more than original estimates. By reducing its share in Browse, Woodside reduces its portion of development costs and limits its exposure to this project’s execution risks.

Woodside currently is the major equity holder and operator of the Browse LNG development. Its 46% stake implies that Woodside would need to fund around AUD18 billion of the total development costs of about AUD40 billion based on market estimates. While Woodside’s internally generated cash flow will increase materially once Pluto begins producing, which we expect will happen in March, Browse’s funding needs would still likely require a significant amount of external financing that would grow substantially if the company also decided to concurrently pursue other large projects in its pipeline, such as the planned expansion to its Pluto projects.

If Woodside reduced its share of the Browse project to 31% from 46%, its portion of the development costs would decline over 33%. Furthermore, we expect the company will receive AUD1.0-AUD1.5 billion (according to market estimates) in proceeds from the sale, which could be used to fund development costs. Therefore, a 15-percentage-point stake sale would reduce Woodside’s total funding need for Browse development by 38%-41% and lower Woodside’s external financing needs, a positive for its credit profile.
Woodside and its joint venture partners were originally expecting to make a final investment decision on Browse in mid-2012. However, late last year Woodside announced that it was seeking to extend the deadline and we now expect a decision in the first half of 2013.