Suppose you wanted to get into the LNG business in the U.S. to take advantage of the global low-cost of supply advantage held by America. So the desire and the rationale are there, but you’d like to avoid some of the headaches associated with building a liquefaction facility. Site selection, permitting, financing, and associated infrastructure to support moving field gas to your site; essentially 7-10 years’ worth of work and trouble before you ever make a dime. In the meantime, maybe your stock tanks from upfront capex and interest charges, perhaps the commodity market turns against you, or a competitor beats you to the market and soaks up all the good offtake contracts. A myriad of stinging little flies to potentially beset you as you lurch toward FID. If you’re a typical CEO, your consumption of aspirin and antacids begins to rise exponentially.
Or you could just buy one off the shelf. One fully the biggest of these headaches, with ground already broken from an operator nearing bankruptcy and willing to sell for a song. It should also be noted that Driftwood was advantaged by sitting just below one of the largest gas fields in North America, with access to other basins already in place, and new, company-owned pipelines to bring gas already under development. That’s the position Woodside Energy found itself in last fall. It didn’t hesitate long before picking this plum off the ground.
Woodside Energy, (NYSE:WDS), Australia’s largest energy operator, has moved into the North American LNG market in a big way over the last 6-9 months. Beginning with its take-out of troubled LNG startup, Tellurian last fall, the company has moved at breakneck pace to move the fully permitted Driftwood LNG project along to FID. Just last month Woodside stunned the investing community by announcing FID approval for the first three trains of the 27.6 mpta Driftwood, now renamed Louisiana LNG. This is a bold move for this Australian energy producer that will bring on-line 16.5 mpta, and CEO Meg O’Neill noted the profound impact on the company in the press release-
“Louisiana LNG is a game changer for Woodside, set to position our company as a global LNG powerhouse and deliver enduring shareholder value for decades to come. Louisiana LNG combines access to an abundant US gas resource, a prime location with best-in-class EPC and technology partners. It builds on Woodside’s proven strengths in project execution, operational excellence, and LNG marketing to deliver significant cash generation potential and drive long-term shareholder value.”
Perhaps this move shouldn’t have been a surprise. The company has been building a portfolio in the LNG space for some time now as noted in the next slide. With ground already broken by the former operator and an EPIC contract in place with Bechtel, one of the top engineering and consulting companies, much of the uncertainty around pre-FID was resolved enabling WDS to move rapidly in this regard.
Some challenges remain as only about 1 mpta of the plant’s approved 16.5 mpta output has been placed under long-term SPA’s (Sales and Purchase Agreement), in a contract with Uniper-a, a German utility company. Other recent U.S. Gulf Coast LNG plants, notably Venture Global, and NextDecade, took the route of selling out 2/3 of their capacity before taking FID. By moving forward and entering the market in the late 2020s, WDS can leapfrog other potential projects and corner the market for supply gas.
RBN in a recent blog post noted the impact that LA-LNG could have on projects still under FID review-
“An FID on a project of Louisiana LNG’s magnitude — again, three trains with a combined capacity of 16.5 MMtpa — is sure to have an effect on developers promoting other, pre-FID projects along the Gulf Coast. These developers will now have a tougher job selling their projects, especially to investors and potential offtakers. Some pre-FID projects have large portions of their capacity “contracted” but these deals are done with Heads of Agreement (HOAs) rather than SPAs, the latter of which is a binding contract for offtake while the former is a less formal agreement that either party can back out of.”
Woodside’s plan to derisk the project involves a significant reduction in its equity stake. One major announcement of an equity partner came last April, with Stonepeak taking a 40% equity interest in LA-LNG and funding 75% of the capital expense through 2026, thereby enabling WDS to defer its capex to 2027, when Scarborough is expected to be online.
CEO Meg O’ Neill was quoted at CERAWeek in a WSJ article-
“Woodside is involved in intensive discussions with a couple of parties interested in participating in its newly approved $17.5 billion Louisiana LNG gas-export project. Woodside wants to reduce its capital commitments to roughly half the cost of developing the project, which will be built in phases and is targeting production of liquefied natural gas for the first time in 2029.”
Through the development of its Pacific Basin (Australian) projects, including Pluto and Scarborough, Woodside has emerged as an experienced LNG plant developer. The opportunity to acquire a derisked and permitted facility with access to low-cost U.S. gas was dangling in the market, and was ultimately seized by the company. The U.S. is the low-cost provider of natural gas globally and much of the current growth in supply from shale is being underpinned by export opportunities to capture more advantageous pricing in the Korean-JKM, and Dutch-TTF, markets.
Your takeaway
Woodside stock has taken a shellacking over the last year, down 25%. This is primarily due to the downdraft in commodity prices affecting cash flow, combined with high capex outlays for Scarborough.
I think the company rates a buy at current levels irrespective of multiples in anticipation of a cash waterfall a few years hence for patient investors as sales ramp up and capex diminishes. With three trains online WDS has the capacity to be exporting a couple of hundred cargoes out of LA-LNG as the next decade starts, with an additional ~150 cargoes from the later brownfield development of trains 4-5. The buy case for WDS is certainly around Scarborough and LA-LNG coming on line as we head into the 2030's
The company trades at a pretty attractive EV/EBITDA multiple-4.11X in comparison with other participants in the LNG cohort, including segment leader, Cheneire Energy, (NYSE:LNG) at 11X. It also pays a nearly 9% yielding dividend that is well covered by cash flow, with a payout ratio-68% that might bear a little watching.
There are risks to this thesis, notably the $9.0 billion in debt the company has accumulated building Scarborough. In contrast, they have $4 billion in cash and an undrawn $6.5 billion RCF. Maturities are spaced out every 4 years, preventing any sort of a credit squeeze. The LNG market appears to have a long runway, thanks to increasing energy demand projections in Asia, Africa, and Latin America. If they don’t pan out, the company could have some problems. Most analysts view the long-term market for LNG as being robust for the next several decades.
If you're one of those investors who looked at Cheneire a dozen years ago at $15.00 and passed, and watched it ramp ever higher ever since, this could be your chance to get in on the fun.
