Analysts who met Woodside CEO Peter Coleman and chief financial officer Lawrie Tremaine on Wednesday saw two executives uninterested in sugar-coating the medium-term challenges facing the LNG industry, hence their need to diversify more into oil which is recovering faster than the dismal LNG spot market.
The company is honing in on exploration potential in Africa and Ireland and possibly looking at small, cheap asset acquisitions.
While Monday's sanctioning of the 69 million barrels of oil equivalent gross Greater Enfield project is a good start, the Woodside executives said more emphasis would be placed on oil exploration - particularly Senegal/Guinea Bissau from the second half of 2017 and Ireland from 2018.
Also on the cards are oil acquisitions that could focus on discovery/appraisal assets rather than exploration phase or producing phase assets, and the Woodside executives said they felt that the bid/ask spread for such assets had recently narrowed to a $5/barrel range.
Big merger and acquisition activity is off the cards for Woodside following its failed tilt at Oil Search, in favour of smaller asset-type deals of up to $US1 billion in size, but it would be rare to come across an asset suitable for Woodside that could be snapped up for so little.
RBC Capital Markets' director and oil and gas analyst Ben Wilson, who was at the meeting, said Coleman affirmed that Woodside had $1 billion worth of current balance sheet capacity before scrip needed to be issued to buy assets.
Morgans Financial's senior resources analyst Adrian Prendergast told Energy News that Woodside had let its debt creep up, so its ability to make a large-scale acquisition had decreased since before it acquired Apache Corporation's Australian and Canadian assets.
Woodside has net debt of about $4.3 billion with gearing of 23% on a net debt-to net debt plus equity basis, courtesy of the Apache acquisitions.
RBC recently noted that large US independents had been cleaning up their portfolios ahead of a more stable oil environment with less downside volatility, with a prominent skew towards shorter-cycle projects - particularly Lower 48 positions - with deepwater and long-cycle opportunities now out of favour.
This was why Wilson yesterday praised Woodside for bucking that trend by taking final investment decision on Greater Enfield.
However, Wilson said Woodside ruled out the US Lower 48 onshore as an area in which it could compete effectively, along with Brazil, noting the company's "pockets are not deep enough for Brazil".
LNG doldrums
Wilson said the Woodside executives believe static or declining demand from the traditional gas buyers Japan and South Korea will struggle to underpin project FIDs, or even favourable contract renewals, particularly as nuclear restarts in Japan accelerate and KOGAS deals with the wind-down of its single-desk buyer status.
The situation appears so bad that Wilson said Coleman indicated that the point at which demand growth from the ‘big two' could return is realistically moving towards the middle of next decade.
This will be partly offset by rising non-traditional buyers like Pakistan, Bangladesh, Egypt, the Middle East and South America, driven by the availability of leased floating storage and regasification units, increasing spot market liquidity, the rise of traders willing to take on credit risk and lower LNG prices.
"While Woodside is not likely to feature as a direct seller to such buyers [due to credit risk], the company could back-to-back with a reputable vendor or at the very least the new demand sources could assist in soaking up excess spot volumes," Wilson said.
"To this point, Woodside sees widening spot market differentials [versus oil linked contracts] as oil recovers due to contract volume reselling strong production performance across the board from new projects.
"On a positive note, Henry Hub as an input to traditional oil-linked contracts no longer seems to be part of the buyer conversations as traditional buyers have contracted sufficient Henry Hub-linked volumes directly to enable benchmark diversity via their portfolios without embedding diversity within individual contracts."
