Analysts React to Chevron, Shell Gas Asset Swap

August 21, 2012

By Gillian Tan

Analysts covering Woodside Petroleum have reacted to Chevron and Royal Dutch Shell’s deal to swap interests in two multibillion dollar Australian liquified natural gas projects.

Macquarie (Outperform, Price target A$39.00): “While the timing of Chevron’s exit is concerning, Shell’s further buy-in to Browse in the wake of Japan Australia LNG‘s entry points to momentum at Browse and growing belief among parts of the JV that this gas will be commercialized,” analysts said in a note to clients.

“That said, Shell will now be more influential in the JV and has made it very clear (with) Arrow that it is in no hurry to sanction projects in Australia’s current cost environment and so may be willing to take it slow at Browse, which won’t help Woodside fill the growing hole in its projection profile post Pluto start-up,” they said, adding the deal increases Shell’s capital expenditure burden in Australia.

“While unlikely in the near term, if both Browse and Arrow were sanctioned, which would amount to Shell capex of up to U$30 billion from these two projects alone, there could well be pressure on its Woodside stake to help fund it all.”

Moelis & Co. (Buy, Price target A$38.00 from A$36.00) : “The asset swap is positive for Woodside in my view,” analyst Gundi Royle said in a note to clients. “Shell now has a higher equity in a greenfield project.  It strengthens the alignment between Shell and Woodside to get Browse off the ground as the partners now control about 60% of the unitized project,” she added.

Citi (Buy, Price Target A$41.02): “The recent Japan Australia LNG transaction to acquire 14.7% of Browse from Woodside for US$2 billion placed a value on the gas of US$0.88 per million cubic feet” analyst Mark Greenwood pointed out in a note to clients. “In this asset swap, the net gas acquired by Shell of 1.3 trillion cubic feet is worth US$450 million, valuing Browse gas at US$0.34/mcf …a significant discount to the earlier transaction,” the broker said.

CLSA (Sell, Price Target A$29.20): Analyst Mark Samter questioned whether the deal would change Shell’s view on its Woodside stake. “My inclination is to say no still…they sold the original stake and flagged the rest was going because they clearly did not like what they saw as insiders on Woodside’s growth projects,” he said. “It is not as if the cost environment has got better in Australia to build one of these LNG projects in the past 18 months.” CLSA believes taking Browse gas to James Price Point would be a disaster for Woodside from an economic perspective. “Even if their notional initial capex budget is between $45 billion and $50 billion, we believe there is no way it could be built for less than $60 billion. At this cost we derive a negative NPV of $0.04 a share for Woodside. Spending net ~80% of your market cap on a project that derives no economic benefit remains a highly unattractive investment proposition,” Mr. Samter said.

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