Woodside Petroleum: Pulls trigger on Sangomar option

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
19 August 2020, 10:21 AM
Sectors Covered:
Mining, Energy

  • Woodside Petroleum (ASX:WPL) has triggered the pre-emptive option on the sale of partner Cairn Energy's stake in its Senegal interests.
  • In our view a value-accretive move that prevents possible US sanctions from what would have been the entry of Russian energy company Lukoil into the JV.
  • The transaction will increase WPL's Sangomar interest to 68% (from 35%) while remaining operator.
  • WPL will pay US$300m upfront, with a US$100m contingent payment linked to oil price and development timeline.
  • We upgrade our target price (Morgans clients can login to view detailed reports and price targets) and maintain our Hold rating.

Move makes sense in value and project terms

WPL has triggered its pre-emptive right on partner Cairn Energy's stake in Sangomar.

Cairn was selling its interest to Russian energy producer Lukoil.

The transaction for WPL makes a lot of sense:

  1. Avoiding possible US sanctions given it prevents a new Russian partner.
  2. The deal on its metrics appears value accretive.
  3. It gives WPL greater control over the project.

Our chief concern remains how value accretive WPL's growth profile appears once fully funded.

Perhaps indicative of a similar concern, WPL also flagged that it will now consider selling down its Sangomar interest over the next twelve months.

Transaction details

With an effective date of 1 January 2020, WPL will make upfront cash payments of US$300m plus working capital adjustments, including the reimbursement to Cairn of the development capex sunk year-to-date.

The transaction also includes a contingent payment of US$100m, linked to oil price and project development timeline.

In return, WPL will increase its stake in Rufisque Offshore, Sangomar Offshore and Sangomar Deep Offshore (RSSD) to 68% while retaining operatorship.

The transaction is still subject to some conditions, key hurdles being Senegal Government approval and Cairn Energy shareholder approval.

Changes to estimates

We have factored in the acquisition and increase in WPL's Sangomar interest.

Net of these changes our valuation increases (Morgans clients can login to view detailed reports and price targets).

While conditions remain to achieving deal completion, we view these as manageable given WPL's position as operator (likely helping on government approval) and Cairn's stretched balance sheet (likely helping on shareholder approval).

A good move that makes sense

We view the transaction as value accretive, albeit adding another project WPL would ideally own less equity in from a funding perspective.

Development of Sangomar continues (possible first oil in 2023), while WPL is still pursuing Scarborough/Pluto T2 and Browse.

Meanwhile the sell-down of Chevron's NWS stake is also progressing (with WPL the most logical bidder).

A lot hinges on WPL's ability to motivate its partners and efficiently source the external capital to capitalize on its growth portfolio.

Trading marginally below fair value we maintain a Hold recommendation.

The key risk to our call is global economic activity (LNG demand drivers) in particular related to Covid-19.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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