Woodside Petroleum reported reduced second-quarter production, after planned shutdowns of the Pluto LNG (liquefied natural gas) plant and North West Shelf (NWS) Train 2. However, production was below expectations after a subsequent unplanned shutdown at Pluto. Processing has since resumed, but not before a revision to 2013 group production guidance of 1% to 10%, from between 88 and 94 million barrels of oil equivalent (mmboe) to between 85 and 89 mmboe. Around 2 mmboe pertains to Pluto, but a further 1 mmboe results from refurbishment of the Vincent offloading vessel taking longer than expected.

Second-quarter revenue fell 7% to USD 1.3 billion, a decline of around USD 65 million or USD 0.08 per share. The loss of Vincent’s higher-value oil in particular crimps profit. The 2014 earnings forecast is marginally higher at AUD 2.53 per share, Vincent’s delayed higher start-up production rates contributing. Woodside’s second-quarter production numbers are of limited consequence to longer-term fair value, capturing continuing expansion to LNG volumes. We don’t foresee any let-up in demand growth for gas, nor particularly for its fastest-growing segment, the seaborne traded fraction. In addition, the trend to cleaner and less carbon-intensive fuels with rising economic affluence is an added favourable tailwind.

The decline of some traditional LNG exporters like Indonesia and Malaysia, and growing domestic use in many remaining hydrocarbon exporting countries, is also positive. The company’s assets represent a substantial proportion of Australia’s long-life, low-cost, exportoriented, expandable gas projects. These ensure low-cost supply, the foundation for competitive advantage in the resources space. Fair value uncertainty is, however, high given the percentage of new projects contributing and the usual risks of operating in the oil and gas space. Woodside’s one-sixth North West Shelf Joint Venture (NWS/JV) stake comprises 34% of our fair value estimate including associated oil projects. Pluto, assuming development of a second 4.5 Mtpa (million tonnes per annum) LNG train, comprises 41%. Combined, that’s 75% of fair value, or 50% if you exclude the assumed second Pluto LNG train.

Producing oil projects Vincent, Stybarrow and Enfield contribute a further 15%. At AUD 37.50 per share, the market is effectively pricing Woodside on this combined 90% slice. Undeveloped Browse and Sunrise LNG projects account for the 10% balance of our fair value estimate. They would represent a far larger share of fair value when associated up-front expenditure is sunk. There is also considerably larger upside if Woodside can ultimately build the NWS/JV out to eight trains from the current five, and Pluto out to five trains from the current one. That case requires new gas discoveries or deals with third parties which we leave off the table for now.