Woodside Petroleum: Scarborough sanctioned

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
24 November 2021, 9:00 AM
Sectors Covered:
Mining, Energy

  • A big week for WPL, reaching FID on Scarborough and signing the share sale agreement (SSA) with BHP making the oil & gas merger binding.
  • Typical for LNG, Scarborough is a mega-project with only an average return profile, leaving little margin for error. WPL estimates a 13.5% IRR and a 6-year payback. This improved slightly on the back of the recent Pluto T2 selldown to GIP.
  • Budget and schedule blowouts remain the largest risks, something experienced by the majority of LNG developments in recent history (including Pluto itself).
  • The development of Scarborough will extend Pluto’s life and as a result meaningfully reduce D&A.
  • We maintain our Add rating on WPL with a (login to view) target price.

Event: Scarborough FID and merger SSA

WPL has achieved a final investment decision (FID) on its US$12bn (100%) Scarborough / Pluto Train 2 (T2) project.

Typical of most LNG projects, Scarborough is mega scale and capital intensive. WPL has struggled to find a partner for the upstream and will (for now at least) go it alone with a 100% interest, while agreeing to sell down a 49% interest in the downstream Pluto T2 to GIP in return for some added capex carry.

If everything goes smoothly Scarborough is expected to have an estimated IRR of 13.5%, a delivered cost of supply of ~US$5.8/mmbtu and a 6-year payback. Our chief concern with the project is that construction almost never goes perfectly for mega-scale LNG projects with +20% blowouts not uncommon.

WPL will need to navigate the tricky upstream risks at Scarborough (large/dry/remote), while the downstream is also not straightforward with Pluto T2 involving a large 5.0mtpa train using a different design from Pluto T1, and co-mingling of gas at the latter.

The development of Scarborough will meaningfully extend the life of Pluto’s existing onshore assets and as a result meaningfully reduce D&A. We expect to get a measure of this at the Q4 result when WPL will provide CY22 guidance.

For now WPL will not pursue any other inorganic/organic growth options, while the merger with BHP Petroleum is expected to deliver synergies of >$400mpa almost immediately (from CY23).

Analysis: Struggling to get excited about Scarborough

With the risks in mind, and WPL’s share of capex (post BHP merger) standing at US$8.9bn, it is hard to get excited about Scarborough. We hope this does not become another case of a poor returning mega project relying on the sunk capex argument, which was what Pluto T1 proved to be.

It is difficult to not think WPL would be better off shelving Scarborough and prioritising the much higher returning growth options within the BHP portfolio (Trion, Shenzi North, Wildling, LeClerc, etc) but it has been clear for some time that WPL’s board and management are wedded to Scarborough going ahead almost on a ‘no matter what’ basis even prior to the appointment of CEO Meg O’Neill.

Regardless of our Scarborough concerns, it is easy to be excited about the BHP merger. Chunky synergies, boosting WPL’s earnings power, transforming its balance sheet (BHP assets are coming without any debt – equivalent to a free capital raising), adding much needed market/geographical diversification, and upgrading WPL’s growth options.

Forecast and valuation update

We have tweaked our operational assumptions around Pluto and adjusted net debt. Our estimates and valuation remain on a pre-merger basis.

Investment view

The positives of the BHP merger in our view easily outweigh the risks presented by Scarborough. We maintain our Add rating with a (login to view) target price.


COVID-related risk to energy resource demand/prices. Risk to BHP merger.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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