Low crude prices threaten Woodside's plans

LOW crude oil prices are likely to sap oil and gas company profits this year, casting a shadow over the viability of large-scale projects earmarked to drive growth. While this tough environment will challenge the industry, two broking houses say this year could be especially difficult for the country’s second-biggest oil producer, Woodside Petroleum. As the global financial crisis grinds on, many believe oil could continue to hover below $US50 a barrel, a far cry from last year’s highs approaching $US150 a barrel. A Deutsche Bank analyst, John Hirjee, said low oil prices and the high cost of capital were shaping up as key risks, given Woodside’s capital expenditure budget is forecast at $7.3 billion this year. “Further downgrades in the oil price would bring down the debt-servicing capabilities of Woodside to concerning levels,” Mr Hirjee told investors as he downgraded his stock rating from “buy” to “hold”. The company will seek to raise up to $1.5 billion in debt to fund the spending, after spending $5.5 billion last year. A Credit Suisse analyst, Andrew Williams, said low oil prices could also threaten plans to boost production by upgrading existing fields – known as remedial drilling. “Both Oil Search and Woodside generally have low-costproduction, but the question is now whether work-over and remedial drilling programs can make economic returns,” he said. The plunge in oil prices has already prompted smaller oil producers to shelve expansion plans. Australian Worldwide Exploration deferred drilling at its lucrative Tui field in New Zealand late last year, and two weeks ago AED Oil suspended drilling at the Puffin field off Western Australia. Woodside suspended a plan to import liquefied natural gas to California through its Ocean Way project on Friday, citing “changed energy market conditions”. Brokers are also wary of Woodside because of a market perception that it is a proxy for the price of oil and Asia’s economic growth – a key market for its LNG sales. As oil prices fell close to $US35 last week, shares in the oil company closed on Friday at $33.53, compared with just over $70 last May. The market is more positive towards LNG plays because global gas demand is seen as robust, but even here there are growing doubts over Woodside’s plans. Mr Hirjee said he saw “clouds forming” over three of Woodside’s planned LNG projects: Sunrise in the Timor Sea, and Browse and Pluto 2 off Western Australia. “For the first time in a long time, Woodside’s transparent growth trajectory is becoming cloudy,” he said. The possible failure to find enough gas, costs from a carbon emissions tradings cheme, and financing challenges could all hamper the projects, he said.
Source: Sydney Morning Herald Jan 19 – Clancy Yeates