cooking with gas

Woodside's Simple Exxon Recipe

Buying the U.S. company's Scarborough stake is an effective solution to declining volumes.
Photographer: Greg Wood/AFP/Getty Images

Too many cooks spoil the broth -- in energy, as in cooking.

Woodside Petroleum Ltd. has long had two alternatives to replace declining volumes at its North West Shelf project, a gas plant on Australia's Burrup Peninsula that started production from offshore fields back in 1984.

In one corner: Browse, an undeveloped site about 1,000 kilometers to the northeast of Burrup with 16 trillion cubic feet of gas plus 466 million barrels of condensate. In the other: Scarborough, out beyond the existing North West Shelf fields and with not much more than half the gas resource at 8.7 trillion cubic feet. 

Filling Station

Resources at Scarborough and Browse could more than replenish Woodside's reserves

Source: Company presentation

Woodside's announcement Wednesday that it would buy Exxon Mobil Corp.'s 50 percent share of Scarborough for up to $744 million puts the smaller resource firmly in front. 

It's not hard to see the advantage. The deal will give Woodside 75 percent of the Scarborough field alongside BHP Billiton Ltd. on 25 percent, and potentially allow it to pipe the gas to its 90 percent-owned Pluto plant, which sits adjacent to the North West Shelf facilities.

Browse, by contrast, is a five-way venture involving units of Royal Dutch Shell Plc, BP Plc, PetroChina Ltd., and Japan Australia LNG Pty, which itself is a joint venture between Mitsubishi Corp. and Mitsui & Co.

Getting that group of investors on the same page to develop a large, remote field at a time when gas prices are still subdued and energy companies worldwide are swearing off mega-developments was always going to be a challenge. With production from the existing North West Shelf fields in decline, the easiest way to guarantee extra cubic feet for existing plant is to go with Scarborough -- especially as BHP is also a partner in both.

Indeed, thanks to its 75 percent shareholding as opposed at 31 percent at Browse, Woodside's resource at Scarborough translates into a slightly larger amount even though the field is smaller. Its share of costs at Scarborough, at $6.8 billion to $7.9 billion, is some way above the $6.3 billion anticipated at Browse -- but keeping a gas plant running with declining utilization isn't a cost-free option, either.

Woodside isn't a cheap way to get exposure to oil and gas these days. Its enterprise value is 7.43 times estimated blended forward 12-month Ebitda, compared to a median 5.76 among upstream oil and gas companies producing more than 100,000 oil-equivalent barrels a day. Relative to reserves -- which, admittedly, will change dramatically if there's more certainty about upgrading Scarborough and Browse -- it comes in at $19.04 per barrel, versus an $8.79 multiple for the peer group.

Not the Best Time

Woodside is raising equity with p/e multiples at their lowest levels in years

Source: Bloomberg

Note: Based on blended forward 12-month price-earnings multiples.

The A$2.5 billion ($2 billion) capital raising announced Wednesday to support developing the two fields doesn't make those multiples much more attractive, but the greater certainty on two projects that have been mired in doubts for years is welcome. Whether it's future development projects or gas, any energy company needs to make sure it has plenty in its pipeline.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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