Slugcatcher: the bearer of bad news

IF YOU thought all the bad news in the Australian petroleum industry had been aired over the past two years then you ought to think again, because from what Slugcatcher has been hearing there's more to come over the next few weeks.
Slugcatcher: the bearer of bad news Slugcatcher: the bearer of bad news Slugcatcher: the bearer of bad news Slugcatcher: the bearer of bad news Slugcatcher: the bearer of bad news

Chevron, the US giant that has been battered by a string of operating losses and cost blow-outs on its Gorgon LNG project, could be in line for more bad news in the shape of asset sales at a low point in the market and yet more cost blow-outs, this time at its Wheatstone LNG project.

Woodside Petroleum, the Australian oil and gas leader, is at risk in getting caught up in the possible problems at Wheatstone because if its ill-timed acquisition of a 13% stake in the LNG project, which came with its acquisition of assets off-loaded by Apache Corporation, including the failed Balnaves oil field.

What's buffeting everyone in oil and gas is a combination of the old and the new.

The old in the form of high cost projects started in better times but with capital cost structures that are simply embarrassing today and the new in the form of an oil price slipping back to $US40 a barrel.

Some of the pressure building in Chevron and Woodside will be released this month as Chevron prepares a series of assets sales that the Wall Street Journal newspaper reckons will raise around $5 billion, and Woodside gets ready to release its half-year profit statement next week.

Speculation around the Chevron asset sales was first aired last Thursday and is reported to include oil and gas production in China, and geothermal assets in Indonesia.

The sales, if confirmed, will bolster the Asian bank balance of Chevron just as it readies for an unexpected capital cost blow-out at Wheatstone, a project generally believed to have avoided the spectacular cost explosion at Gorgon.

Numbers have not been aired yet for the Wheatstone cost increase but earlier this year analysts at the investment bank, Citi, reckoned the project was looking at a 15% increase on its $US29 billion budget. If correct then Wheatstone could see $4.35 billion added, with Woodside's share of the increase around $600 million.

More recent media reports suggest that the revised budget could be $10 billion higher, with Chevron's 64.1% share meaning it needs to find an extra $6.4 billion - a number that dovetails neatly with the $US5 billion expected from regional asset sales.

For Woodside, a $10 billion increase in the capital cost of Wheatstone means it will need to chip in an extra $1.3 billion, and that's a lot for a company already battling with its ill-timed investment strategy.

Whether Wheatstone costs an extra $5 billion or $10 billion might actually turn out to be irrelevant when it comes to future of Woodside, a company poised for a period of change as shareholders become more restless about management decisions and a major shareholder (Shell) prepares to offload its residual stake in the stock.

August 19 is Woodside's next date with its destiny. Investment analysts are not expecting much in the way of good news thanks to the low oil price, its knock-on effect on the price of LNG, and the potential for whatever spare cash might be floating around being diverted to Wheatstone.

Because half-year forecasts are not the way analysts work it's necessary to look at the latest full-year tips which in the case of Credit Suisse are for Woodside to see its revenue fall from $4.5 billion in 2015 to $3.6 billion this year and for net income to fall from $1.12 billion to $597 million.

With profits plummeting the last thing Woodside shareholders want to hear is that they're facing the need to find an extra $600 million (or $1.3 billion) for Wheatstone.

And then there's that looming shake-up of the Woodside share register with Royal Dutch Shell making it abundantly clear that it wants to sell its remaining 13.3% stake in a company that it had tried (twice) to buy.

That Shell is a seller of its Woodside share is not a secret, but what has changed is the increasing urgency of an exit with Shell wanting to capital for other projects, such as its highly ambitious but unproven Prelude floating LNG project.

At Woodside's current share price Shell could harvest a handy $2.3 billion.

What makes the timing of the Shell exit interesting is the possibility that it wants to apply the capital liberated to Prelude just as Chevron is selling Asian assets to meet the Wheatstone budget blow-out.

That suggestion is totally conjecture on the part of Slugcatcher, but there is a certain symmetry to the Chevron and Shell capital-raising deals given that both are battling high capital costs at projects launched when the oil price was more than double where it is today.

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