4th UPDATE: Woodside Flags Pluto LNG Cost Increase
(Adds S&P placing Woodside on negative credit watch)
By Ross Kelly
Of DOW JONES NEWSWIRES
SYDNEY -(Dow Jones)- Woodside Petroleum Ltd. (WPL.AU) on Friday flagged a cost
increase of between A$672 million and A$1.1 billion at its Pluto liquefied
natural gas project in Western Australia state, increasing pressure on the
company to raise capital through an issue of new shares.
Woodside said in a statement the foundation cost of Pluto is likely to be 6%-
10% above its original July 2007 estimate of A$11.2 billion due to "lower than
budgeted productivity in both onshore and offshore construction". It also said
the project is on schedule to ship LNG from its first production unit by early
2011.
Analysts are divided on whether Australia's biggest pure play oil and gas
company will eventually tap the share market for funds, with much hinging on the
progress of a planned expansion of Pluto beyond its foundation stage and the
construction of two other LNG projects.
Chief Executive Don Voelte told reporters in Perth that Woodside has no
immediate plans to raise equity but it may need to source more debt to cover the
cost hike.
"We just don't look at the capital markets as a necessity at this point,"
Voelte said.
But in a bad sign for the company, ratings agency Standard & Poor's late on
Friday placed its A- long term credit rating on Woodside on "CreditWatch with
negative implications". A downgrade to Woodside's credit rating could increase
the cost of its debt.
S&P said in a statement that it already had a negative outlook on Woodside and
will aim to resolve the CreditWatch in the next two weeks after seeking to
understand the company's response to the cost hike. Earlier, a spokesman
for Woodside said there is no specific reason for the cost increase, which he
said was wrapped up in general productivity issues. These could include progress
of work such as drilling and welding activity on any given day, he said.
"After three months of peak construction, we now have a better handle of what
we can expect going forward," the spokesman said, adding that the cost hike is
largely based on expectations of upcoming spending.
While cost increases are never good and A$1.1 billion sounds like a lot of
money, it's hardly cataclysmic for Woodside, considering the large size of the
project and the fact that it's 82% complete, leaving less room for more nasty
surprises.
"The project's still on schedule and compared to total capex of around A$12
billion, a 6%-10% increase is not all that bad," Gordon Ramsay, energy analyst
at UBS, said.
LNG projects often experience cost blowouts and the market may have been
anticipating one to occur at Pluto. At 0500 GMT, Woodside shares were down 2.8%
compared with a 1.3% fall in the broader market.
Woodside is one of the few large companies on the S&P/ASX 200 that hasn't
tapped equity investors for capital and analysts at JPMorgan estimated earlier
this week that it may raise around A$3.5 billion from a combination of a capital
raising and dividend underwrites - but only if it sanctions an expansion of
Pluto to two production units by late 2010 as planned.
Woodside is also operator of the proposed Browse and Sunrise LNG projects,
although, along with Pluto 2, these face hurdles ranging from gas supply issues
to political risks.
UBS' Ramsay said it's a little too early to be certain on whether an equity
raising will occur, with a final investment decision on the Pluto expansion at
least a year away and Woodside still short on gas.
"And we'll have to look at the status of Browse and Sunrise as well," Ramsay
said.
Pluto is one of about a dozen LNG projects planned in Australian and Papua New
Guinea but only a few projects are currently under construction globally.
The proposed Exxon Mobil-led PNG LNG project last month increased its
development cost estimate to US$15 billion from US$12.5 billion despite
experiencing a better contracting environment amid a slowdown in global economic
growth. It partly pinned the cost increase on an expansion of the project's
planned capacity, the inclusion of pre-start up operating costs and the bringing
forward of a drilling program for the second phase of the project.
Leading market commentators, such as BHP Billiton Ltd. (BHP.AU) Chief
Executive Marius Kloppers and the Reserve Bank of Australia, have recently
warned of a possible return of labor shortages in coming years with a pick up in
demand for resources.
-By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com
(Stephen Bell in Perth contributed to this article)
(END) Dow Jones Newswires
11-20-090206ET
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