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THE WALL STREET JOURNAL: Demand for natural gas ignites shares of Woodside Petroleum: "High oil prices mean that Shell has plenty of cash to do a deal. But a new Woodside takeover costing around A$30 billion is considered unlikely.": Friday 30 December 2005

December 30, 2005

Surging demand for natural gas has fired up the share price of Australia's Woodside Petroleum to record levels in the past few weeks, and further gains may be just over the horizon.

Despite a near doubling in its share price in 2005, most energy analysts don't expect the heat to come out of Perth-based Woodside any time soon.

Aside from critical milestones due in the new year on its multibillion-dollar Pluto and Sunrise projects, the company is poised to lift production by a third in 2006 as new oil and gas fields come on stream.

And recent overseas deals, namely ConocoPhillips's US$35.6 billion cash-and-stock proposal to acquire Burlington Resources Inc., have reminded investors that Woodside may look cheap to cashed-up global energy groups looking to acquire gas producers.

UBS analyst Gordon Ramsay believes Woodside is underpriced, despite its shares surging to a high of A$39.39 (US$28.72) in December on the back of a 15-year sales deal for its Pluto field, off the coast of Western Australia. News of the deal, which strongly increases the chances of Pluto getting a go-ahead in mid-2007, prompted Mr. Ramsay to lift his Woodside target price to A$44.11 from A$38.13. The stock closed Thursday at A$38.90.

"I just love the long-term story, so if you look at Woodside more than a year out, the stock is not expensive," he said. Already Australia's biggest energy group, Woodside may lift production 30% in 2006 as it brings three projects on stream, starting with the Chinguetti oil field off the coast of Mauritania in February.

Longer-term, Woodside may double production by the end of the decade as it lifts exports of liquefied natural gas from its one-sixth-owned, and operated, North West Shelf venture, alongside new developments such as Pluto. It aims to produce up to seven million metric tons a year of LNG from Pluto. The 100%-owned field lies 190 kilometers off the coast near the North West Shelf, which recently approved an A$2 billion (US$1.46 billion) expansion.

Woodside is also boosting exploration spending by 50% in 2006 to around A$500 million. The number of exploration wells will roughly double to around 40 as drilling activity rises steeply in Libya and the Gulf of Mexico.

"We still see Woodside as ranking better than average across the market," said Don Hamson, head of active equities, Asia-Pacific, for State Street Global Advisers, which holds Woodside shares as part of its A$5 billion active Australian equities fund.

Mr. Hamson is comfortable with Woodside's share-price valuation, despite the recent leveling off in booming oil prices. Credit Suisse First Boston is also bullish on the stock, recently upgrading it to "buy" from "neutral" and lifting its 12-month share-price target from to A$42 from A$36. The broker said Woodside remains its preferred oil-sector growth story, based on new developments that are skewed toward high-margin crude-oil projects.

Deutsche Bank energy analyst John Hirjee rates Woodside a "buy" with a price target of A$40. He expects to see "two years of very strong earnings per share growth."

But Stuart Baker, an analyst at Morgan Stanley, takes a contrarian view, regarding Woodside as "expensive" after its share-price surge this year.

"Some of its performance could get unwound because our view is that oil prices will be lower next year and the year after," he said, adding that Morgan Stanley has a "sell" on the stock with a price target of A$30.

"When we add up all of the projects, including Pluto, we can't get to A$37 a share," he said.

Deutsche Bank's Mr. Hirjee agrees that oil may soften. His firm predicts prices will average just US$45 a barrel in 2007, down from an expected US$60 a barrel in 2006. "But even if oil prices come off, they [Woodside] have the ability to withstand that downdraft because of their strong production growth," Mr. Hirjee said.

High energy prices have helped the cause of Don Voelte, who took over as chief executive of Woodside in April 2004 with a mandate to expand the company beyond the North West Shelf.

Mr. Voelte has raised eyebrows in Perth's tightly knit energy sector by his aggressive marketing of Pluto, which was only discovered in April. He wants to fast-track the field because it will dramatically lift Woodside's share of world LNG trade by the time a forecast shortfall of the fuel develops next decade.

In contrast, Chevron's much bigger Gorgon field, situated relatively close to Pluto, was discovered in the 1970s. Yet the Gorgon partners -- the others are Royal Dutch Shell and Exxon Mobil -- only secured major customers this year. Deutsche Bank's Mr. Hirjee said Mr. Voelte can take some of the credit for "rallying the troops" at Woodside and making it his mission to develop at least one LNG project in his expected five-year term.

Investors and gas customers, meanwhile, will be watching closely the results of Woodside's Pluto-2 appraisal well, which is due to be drilled over the next few weeks. "The Japanese will want comfort that there are enough gas reserves at Pluto to underpin those sales contracts," Mr. Hirjee said, in a reference to Tokyo Gas's recent agreement to buy up to 1.75 million tons of LNG a year from Pluto starting in late 2010.

Over the next six months, Mr. Voelte will aim to boost Pluto's estimated 3.5 trillion cubic feet of gas to four-to-five trillion cubic feet, Mr. Hirjee said. Second in line behind Pluto is Woodside's 50%-owned Browse venture, further offshore, which could come on line in 2012 if it secures customers in Asia and the U.S.

Woodside also owns one-third of the US$5 billion Sunrise field, in the Timor Sea, where work has stalled because of a long-running border dispute between Australia and East Timor.

East Timor Prime Minister Mari Alkatiri said recently that a revenue-sharing deal with Australia will be signed in Sydney on Jan. 12. But analysts warn that the official signing won't automatically push Sunrise to the front of Woodside's project-development queue.

Mr. Ramsay, the UBS analyst, said the deal still needs to be ratified by the East Timor parliament. "I worry about that," he says. ConocoPhillips owns 30% of Sunrise, while Royal Dutch Shell owns 26.6% and Japan's Osaka Gas Co. has 10%. Shell also owns 34% of Woodside. The Anglo-Dutch group tried to take over Woodside several years ago, but the A$10 billion bid was blocked by Canberra on grounds of national interest.

High oil prices mean that Shell has plenty of cash to do a deal. But a new Woodside takeover costing around A$30 billion is considered unlikely.

Aside from the political obstacles, Shell has said that it would be hard to find an attractive big target at today's valuations. Another theory has Shell selling the Woodside stake, potentially to China's Cnooc, following that group's failed bid for Unocal earlier in 2005.

But Shell Australia Chairman Tim Warren said recently that he is "more than happy" with the stake, given Woodside's strong share-price gain over the past two years.

Write to Stephen Bell at

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