Bloomberg News

Woodside Risk Tumbles to 2009 Low on LNG Cash: Australia Credit

July 10, 2012

Woodside Risk Tumbles to 2009 Low on LNG Cash

The Australian government in April allowed Woodside to defer an investment decision on Browse until the first half of 2013, providing more time for engineering work. Photographer: Ron D'Raine/Bloomberg

Woodside Petroleum Ltd. (WPL)’s bond risk fell to a 2 1/2-year low relative to global peers as the explorer delays spending and starts production at its $15.3 billion liquefied natural gas venture in Western Australia.

The cost to insure Woodside’s debt with credit-default swaps dropped to 170 basis points on July 9, from a high of 242 on Oct. 5, according to data provider CMA. The contracts cost 46 basis points less than swaps on an index of global oil and gas companies on July 5, the biggest advantage since December 2009, the data show.

Debt investors are rewarding Woodside, which began producing gas from its Pluto plant in April, for slowing outlays amid mounting cost pressures. Companies from Woodside to BHP Billiton Ltd. (BHP) and Rio Tinto Group have signaled they’ll pare back Australian mining and energy developments as the global economy weakens, reducing investment plans the government estimated in April at more than $500 billion.

“There’s increasing comfort in Woodside,” Gus Medeiros, a senior credit analyst at Deutsche Bank AG, said in a phone interview from Sydney. “With the completion of Pluto, Woodside is becoming a highly cash-generative company, and in terms of additional capex, management will be relatively conservative going forward.”

Pluto Output

Pluto is projected to contribute the equivalent of 17 million to 21 million barrels of oil to Woodside’s production in 2012, raising total output to 73 million to 81 million barrels for the year, the company said in February.

Woodside agreed in May to sell a 14.7 percent stake in its proposed Browse LNG venture to Mitsubishi Corp. and Mitsui & Co. for $2 billion. The other partners in Browse are BHP, BP Plc, Chevron Corp. and Royal Dutch Shell Plc.

Moody’s Investors Service changed its rating outlook on Woodside to “stable” from “negative” in May, citing the influx of cash from Pluto and the stake sale.

“The incremental cash flow expected from Pluto combined with the proceeds from the Browse sale will provide Woodside with significant flexibility to reduce debt and improve its financial profile to more comfortable levels,” the ratings company said in a May 10 report.

Woodside holds a Baa1 grade from Moody’s, the eighth- highest investment grade ranking, and an equivalent BBB+ from Standard & Poor’s. Laura Lunt, a Perth-based spokeswoman for Woodside, declined in an e-mail to comment on the company’s credit-default swaps.

Bond Yields

Elsewhere in credit markets, Australia’s benchmark 10-year government bond yield declined one basis point to 2.99 percent at 5 p.m. in Sydney yesterday, or 147 basis points more than similar-maturity Treasuries.

Swaps trading shows investors see a 74 percent chance the Reserve Bank of Australia will cut the overnight cash-rate target by 25 basis points to 3.25 percent next month, according to data compiled by Bloomberg.

The nation’s currency bought $1.0185. The so-called Aussie has risen 45 percent since the end of 2008, adding to costs for Australia’s LNG industry.

BG Group Plc said in May the bill for its project in Queensland state jumped 36 percent to $20.4 billion because of gains in the Australian dollar, rising labor and material costs and higher regulatory expenses.

Investors expect inflation in Australia will average 2.40 percent over the next 10 years, based on the gap between benchmark yields and rates on notes linked to consumer-price gains. The so-called breakeven rate has dropped since reaching a 2012 high of 2.92 on March 19. The RBA aims to keep underlying inflation in a range of 2 to 3 percent.

Corporate Spreads

Relative yields on Australian-dollar corporate bonds rose 2 basis points this month to 268 basis points on July 9, Bank of America Merrill Lynch index data show.

The Markit iTraxx Australia index of credit-default swaps that measures perceptions of corporate bond risk on 25 companies including Woodside fell 3.5 basis points to 179.5 yesterday, according to Markit Group Ltd.

Contracts on Woodside will outperform the broader gauge as the Browse stake sale and possible postponements of spending on other projects strengthen the company’s financial profile, according to Ben Byrne, a Sydney-based credit markets analyst at Citigroup Inc.

“Any delays to project capex would likely see positive free cash flow generation over a longer period of time, improving the position of the company’s balance sheet ahead of future growth expenditure,” Byrne said in a phone interview.

The difference between swaps on Woodside and BHP may narrow to 30 to 40 basis points in the “medium term,” Byrne said.

BHP Swaps

Default swaps on BHP traded at 105 basis points on July 9, 65 basis points cheaper than contracts on Woodside, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Investors seeking to profit from an improvement in Woodside’s credit profile compared with BHP’s may be better off buying bonds instead, where the difference in spreads is even wider, Byrne said.

Woodside’s $700 million of 4.5 percent 2014 bonds yielded 178 basis points more than swap rates yesterday, according to BNP Paribas prices. That compares with a 35 basis-point spread on BHP’s $1.5 billion of 5.5 percent securities due the same year, the BNP Paribas prices show.

Woodside had $1.8 billion in cash and undrawn debt as of April 30, which will be boosted by the Browse proceeds late in the third quarter, the company said in May.

Delay Approved

The Australian government in April allowed Woodside to defer an investment decision on Browse until the first half of 2013, providing more time for engineering work. The Browse development may cost as much as A$44 billion, Deutsche Bank estimated in a report this month.

The venture will probably be delayed further, Mark Greenwood, a Sydney-based oil and gas analyst at Citigroup, wrote in a July 4 report. Woodside is unlikely to reach a decision to go ahead with Browse in the first half of next year because of increasing construction costs, he wrote.

Deutsche Bank this month cut its forecast for Brent crude prices in 2012 by 9.4 percent to $106.28 a barrel on speculation Europe’s debt crisis, together with faltering growth in China and the U.S., may crimp demand.

BHP Chief Executive Officer Marius Kloppers scrapped an $80 billion investment target in May. Rio Tinto in April pulled out of a planned A$9 billion coal port expansion in Australia’s Queensland state, citing a weaker global economic outlook and rising costs.

China Slowing

China’s imports rose less than anticipated in June, customs bureau data released yesterday showed. Inbound shipments increased 6.3 percent from a year earlier, compared with the 11 percent median estimate in a Bloomberg News survey of 32 economists.

Australian business confidence fell to a 10-month low in June, a National Australia Bank Ltd. survey released yesterday showed. Confidence in the mining industry slumped as slowing growth in China and Europe’s debt crisis hurt the outlook for global commodity demand, said NAB Chief Economist Alan Oster.

Woodside last year deferred a decision to order equipment to build a second phase at Pluto, which Deutsche Bank estimates may cost A$10 billion.

“Woodside will adopt a disciplined approach to the funding and pace of future large-scale projects,” Standard & Poor’s said in a report last month, when it joined Moody’s in revising its outlook on the company to stable from negative. “Production from the Pluto project and lower capital expenditure will improve the company’s cash flows and key credit metrics.”

To contact the reporter on this story: James Paton in Sydney at jpaton4@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net


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