Macro Intelligence: Woodside Energy expands LNG ambitions with $1.2 billion Driftwood acquisition

Woodside's fiscal 2024 earnings release

Woodside releases its fiscal 2024 earnings on 27 August.

Going big

Woodside Energy (ASX: WDS) plans to go even bigger into LNG, agreeing to buy Tellurian and its US Gulf Coast Driftwood LNG development in a deal valued at $1.2 billion.

CEO Meg O’Neill says the acquisition will turn Woodside into a global LNG powerhouse.

“We are disciplined in creating shareholder value, have a track record of positioning the balance sheet to accommodate growth, and we recognise that our strong dividend payout is an important element of our investment case.”

Woodside Energy daily chart

Driftwood LNG development: a $1.2 billion investment

Woodside's plan is to construct five LNG trains in a phased development with a total permitted capacity of 27.6 million tonnes per year. It is targeting Phase 1 development from the first quarter of 2025 and, importantly, also plans to sell down its equity stake in the project to around 50%.

Woodside says the Driftwood assets will allow the company to better serve customers globally, enabling value creation and increasing long-term cash flow generation.

“Woodside shares have really been hammered on the fact that they haven't only bought a business, but they have bought a very large capex bill,” Wilson Asset Management’s Anna Milne recently told ausbiz.

Tellurian daily chart

Balancing act: weather impacts and revenue growth

Separately, Woodside's recent quarterly production report showed a 1% fall from the previous quarter due to weather impacts at the North West Shelf and unplanned outages elsewhere. Still, the company is maintaining its full-year production guidance.

Quarterly revenue hit $3.03 billion, up 2% on the first quarter.

Woodside Energy comparative performance table

IEEFA's warning: oversupply looming in global LNG markets

Woodside's firm view is that LNG will play a big role in the transition away from fossil fuels as an alternative to coal, and as a backup to renewables. It says the US Gulf Coast M&A will allow it to “thrive” through the energy transition.

However, it is not a sure bet LNG demand will continue at pace through the coming decades.

A recent report from the Institute for Energy Economics and Financial Analysis (IEEFA) has found lacklustre demand growth combined with a massive wave of new export capacity is poised to send global LNG markets into oversupply within two years.

IEEFA also says combined LNG imports to Japan, South Korea and Europe fell in 2023 and will likely continue to fall through 2030. In emerging Asian markets, the IEEFA reports structural LNG demand growth faces a “complex web of economic, political, fiscal, financial and logistical challenges.”

LNG demand forecast chart

China and India: key drivers in LNG demand

China was the world’s largest LNG importer in 2023, with policies to bolster energy security a counterbalance to its use of LNG as a transport fuel. Wood Mackenzie reported sales of LNG-powered heavy vehicles in China rose from over 10% to around 30% by the end of 2023. India also drives demand for LNG primarily as an industrial fuel, however, India has no plans to build more gas-fired power plants.

Investment analysts weigh in: is Woodside a buy?

UBS agrees with the rationale of the Driftwood acquisition. Its analysts expect it to add scale and diversity to Woodside's global LNG portfolio, however, UBS is cautious about the project’s ability to meet Woodside's investment hurdle rates. It calls the deal “an infrastructure investment with commodity exposure.”

UBS says Driftwood is comfortably funded and won’t stop Woodside from pursuing other opportunities in LNG or offshore oil. However, it says Woodside's plan to sell down 50% equity at the final investment decision as being necessary to de-risk the capex and to maintain its dividend, but calls its ability to do so a key risk for the second half.

UBS is ‘neutral’ on Woodside with a price target of $31.00.

Driftwood LNG key assumptions table

Macquarie’s optimism

Macquarie is positive on the acquisition, saying the Driftwood development is an attractive opportunity for Woodside to grow its LNG marketing and trading business, saying Woodside is uniquely placed to capture growth in the segment. It lists a number of key catalysts for the Woodside share price including the takeover, Sangomar production rates, Scarborough LNG progress, and LNG pricing trends.

Macquarie reckons Woodside may be better rewarded by the market when it agrees to a selldown to help it manage its capex commitment. It expects Woodside to more fully articulate its Driftwood proposition once the takeover of Tellurian is complete.

Macquarie has an ‘outperform’ rating on the stock with a $32.00 price target.

Woodside Energy key catalyst timeline

Citi’s skepticism

Citi says management must fight an uphill battle on the merits of the Tellurian acquisition. Analysts there say it all depends on Woodside's ability to sell its LNG at a wider spread than forward curves and current contract pricing, which they say is doubtful.

Citi says the deal is a “difficult sell to equity investors.” It reckons the market will fail to give Woodside the benefit of the doubt when it comes to its ability to earn an acceptably high return on the capital outlay for Driftwood versus alternative uses of capital, particularly shareholder returns.

Citi points out LNG contract prices have been deflating, which casts doubts on Woodside's ability to sell down from 100%, potentially leaving Woodside with more equity in the project than it may like.

Citi has a ‘neutral’ rating on Woodside, with a price target of $28.00 per share.

Woodside Energy analyst recommendations