Woodside's success as Australia's largest independent oil and gas company almost didn't happen. It spent its first 17 years drilling dry holes all over eastern Australia. A change in fortunes came when the company gambled on a 100-pound exploration permit off the coast of Western Australia.
As a result of that punt and what followed, Woodside's market capitalisation has increased roughly 36,000 times since listing in 1954. The permit turned into the North West Shelf (NWS), Australia's largest resource project and, alongside the purchase of Manhattan, must surely rank as one of history's great bargains.
In my three columns this week I'm going to explore this remarkable business and share our team's recommendation on the stock.
Aside from the NWS, Woodside produces substantial amounts of oil and gas from other operations offshore Western Australia, Gulf of Mexico and Africa. Woodside also has exploration projects in Brazil and Korea. Last year, it generated almost $6 billion of revenue from production of 81.3 million barrels of oil equivalent (`mmboe' in industry lingo).
While half of Woodside's production comes from oil and condensate, its future lies with natural gas - in particular Liquefied Natural Gas (LNG), which constitute over 80% of its current reserves (see charts above). But to assess the merits of the company, we'll first need to delve into the basics of the LNG industry.
Illuminating LNG
It's more difficult to transport natural gas than oil. Oil is extracted as a liquid so producers can simply truck, ship or pipe it from where it's found to where it's needed. But transporting gas has traditionally required a network of perfectly sealed pipelines, lest the pesky molecules escape.
This presents a problem. A gas resource can only be developed if it's large enough to justify the cost of laying pipe infrastructure to potential customers. More importantly, since gas delivery depends on pipes, gas markets develop only where pipes are located, leading to the development of regional gas markets.
That's why newsreaders report the price of oil rather than gas each night. There is no international gas market. Gas prices differ the world over and even within a country's borders. To take advantage of the highest prices, producers therefore need to be able to transport gas around the world, which is where LNG comes in.
LNG refers to the process of turning gas into a liquid, or liquefaction. In liquid form, LNG fills just 1/600th of the space that it does in its gaseous state, making the economics of transportation, particularly by sea, much more attractive. One tanker of LNG, for example, can supply 40% of Japan's daily energy needs. At the end of its journey, the liquid is turned back into gas in a process known as regasification, for distribution via domestic pipelines.
LNG does two important things for the gas market. Firstly, it improves the economics of gas production by allowing large producers to reach markets where they can obtain higher gas prices. Qatar has recently been diverting LNG sales to Asia rather than the EU for this very reason. Secondly, it makes viable previously ``stranded'' gas fields - those that were too remote from customers to use pipe infrastructure.
So LNG is an incredibly useful and flexible energy source and is an important, and growing, part of the global energy market. In our next column, we'll examine the nature of the global LNG market and its supply and demand characteristics, before a discussion of what Woodside's current share price means for today's prospective investors.
This article contains general advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website.
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