Can Woodside Petroleum be lifted by natural gas?
As the ASX’s biggest petroleum producer WPL’s profits are obviously highly dependent on the oil price. A supply glut that has persisted over the last couple of years has led to a crash in prices. Oil prices fell from above $100 /barrel in 2015, to a low of approximately $26 earlier this year. They have since rebounded but are still well off their highs. Historically, the Organisation of Petroleum Exporting Countries (OPEC) would manage the oil price by adjusting supply and in the present situation one would expect them to be cutting output to boost the price. Unfortunately for companies like WPL, OPEC is struggling to reach a consensus among members, many of whom want to continue ramping up production despite the low prices. Furthermore, shale production from the US has not dropped as far as expected based on the lower oil prices. This has ensured that supply remains abundant and makes OPEC nervous that any market share they concede through supply cuts will be taken up by US producers.
With a market capitalisation of $24bn, WPL is Australia’s biggest petroleum producer by a large margin; the next biggest being Oil Search (OSH) with a market capitalisation of $10bn. The composition of WPL’s production output has shifted dramatically from oil to natural gas over the last five years. In late 2011, before WPL started production from the Pluto gas fields near Karratha W.A., over 40% of the company’s revenue came from oil. For the next few years that percentage dropped to around 17% and in the most recently released quarterly report, the percentage of revenue from oil was just 8.4%. The balance largely comes from Liquefied Natural Gas (LNG), making up 70% of revenue this quarter. Unfortunately for WPL, natural gas prices have dropped alongside the oil price, reaching a low of $1.66 in February this year after spiking above $5 in 2014. The good news is that prices are rebounding and today’s price is a full 70% above the February low. (LNG pricing varies from the natural gas price due to costs associated with liquification and the particular supply/demand dynamics of the LNG market but natural gas prices should be a reasonable gauge for LNG pricing.) Despite the massive price rebound, the impact on revenue takes some time to feed in with third quarter revenue up just 17% from the second quarter which includes the effect of an increase in production and sales.
Despite the current company focus on natural gas, WPL recently entered into a transaction to acquire a sizeable deep water oil asset from ConocoPhillips in Senegal. The acquisition will boost WPL’s 2C oil resources by 230% (assuming the agreement completes) and perhaps lift WPL’s relative oil production. More recently, WPL has also signed a binding agreement to purchase BHP Billiton’s (BHP) gas assets in the Carnarvon Basin, further boosting WPL’s gas reserves. Both transactions are expected to complete in late 2016.
With regard to power generation, natural gas is a significantly cleaner fuel (environmentally wise) than coal. In March next year, Australia’s ‘dirtiest’ power plant, the Hazelwood power station in Victoria, will close. This will remove significant power generation from the grid. This may produce a push towards increasing Australia’s gas fired power generation and perhaps even lead to the reopening of the Pelican Point gas plant in South Australia. The move towards cleaner power generation is not unique to Australia and therefore WPL’s push towards increasing natural gas production may reflect a bullish long-term view of the market. Nevertheless, WPL appears to have survived the worst of the oil (and natural gas) price declines and can hopefully continue to grow its revenues from here on.