Buy-recommended Woodside Petroleum Ltd. (OTCPK:WOPEY) offers unlevered appreciation potential of 11% to a McDep Ratio of 1.0, where stock price would equal Net Present Value (NPV) of US$49 a share. In line with expectations from six months ago, half-yearly results released on February 21 tracked a steady trend ahead of startup of new liquefied natural gas (LNG) cap doacity, now expected in August. The company’s high growth prospects support a high cash flow multiple (PV/Ebitda) of 14 times. Most of the value (40% in natural gas and 33% in oil) corresponds to resources currently generating cash flow as well as Pluto 1, the first phase, or train, of a new LNG plant to start up six months from now.
A flawed flare tower, labor disputes and now a cyclone have delayed Pluto 1 about a year. The remainder of value (27%) corresponds to contingent resources expected to be part of future LNG plants, including more trains at Pluto and new projects such as Browse and Sunrise awaiting Final Investment Decision (FID). The projects contribute to potential six-fold expansion of natural gas capacity by 2020. High cash flow from shorter life oil production is helping to fund LNG expansion.
Though most of the payoff for investors in Woodside may unfold over the years, a successful Pluto startup amid a positive energy investment climate may offer an earlier reward. The elements of an energy investment boom until the next U.S. election appear to be falling in place, with the latest example being the chaos in Libya. We seem to be replaying the 1979-1980 economic and energy cycle. The U.S. as the leading global economy is stimulating economic growth and restricting its own oil supply as it did then. At the same time, consuming countries are unable to contain and may be abetting political instability in producing countries that interrupts supply. Equity investors profited from inept U.S. political leadership until a new president was elected in November 1980. Then a shift to bonds would have been more advantageous temporarily. Whether or not that cycle repeats, long term investment in new clean energy supply makes sense in our opinion.
Originally published on February 23, 2011