Livewire is rolling out a debut series, ‘Stocktoberfest, to showcase new stock ideas (and beer suggestions). We put the spotlight on a blue chip that is well prepared to meet soaring demand for its product, which we feel the market is still underestimating, and tip our choice of IPA to 'Prost' Stocktoberfest with. 

 

Woodside: Meeting China's booming demand for LNG

China’s demand for LNG is booming…. driven by a relentless quest by the Chinese Government for cleaner air and blue skies. Woodside Petroleum is well positioned with infrastructure and resources to supply this insatiable demand.

The biggest pollution issue in China is the direct burning of coal for energy outside the power generation sector. China burns around half the world’s thermal coal, and about half of China’s coal burn is NOT for power generation. China is still using coal for domestic heating purposes that the rest of the world phased out decades ago.

The number one way to reduce air pollution in China is to replace the direct burn coal with gas. Government policies are designed to address air pollution by encouraging gas use in place of coal. The Chinese Government is aiming to increase the share of gas in the energy mix from 5.3 percent in 2015, to 8.3 -10 per cent in 2020. This translates into a national gas growth rate range of 11.5-15.7% p.a. between 2015 and 2020.

The long term thesis is that there is an almost infinite demand pool for gas to grow into over the long term as the population converts to domestic household gas usage.   10 years ago China was self-sufficient in gas, in 2017 imported gas made up 40% of Chinese usage

LNG imports have taken off as Chinese domestic gas production hits a plateau, and existing gas import pipelines are at capacity. The alternative is LNG imports.

China’s LNG imports in the first eight months of 2018 leapt almost 50 per cent, as China looks set to overtake Japan as the largest importer of LNG.  Australia is the second largest exporter of LNG supplying just under half of China’s demand.  On the demand side, the story goes beyond China with a large portion of the demand growth in our forecast window coming from emerging Asia and India, with the Indian Government aiming to increase the share of gas in the energy mix from 6.5 per cent at present to 15 per cent as soon as 2022.

We see the need for major new investment in large LNG projects or there will be a substantial shortfall in global supply developing by the mid-2020s.  In our view Woodside is well placed to significantly benefit. It will likely benefit from firmer LNG pricing from its existing production base the North West Shelf, Pluto and Wheatstone.

It will likely also benefit from production growth from its Burrup Hub concept, which includes the large Browse and Scarborough tie-back projects.  Importantly these projects are likely to be globally competitive on costs, we estimate occupying the second quartile of the cost curve due to extensive utilisation of existing onshore infrastructure and the distinct Australian geographical advantage accessing developing Asia.

We think the market may be undervaluing two parts to the story  

The first being the global demand for LNG. We believe Chinese demand will drive global demand significantly higher than the current 2025 consensus demand forecast of  ~420Mt (4.6%pa growth). On our modelling, global demand will reach ~502Mt in 2025 (7.0%pa growth)

The second is the value of Woodside’s projects, Scarborough and Browse.  We see a tendency for the market to risk weight long-dated projects, and then progressively add value as the project gets closer to fruition with valuations following the share price up. In our view, the long-term dynamics of the LNG market are extremely supportive of new LNG projects and Woodside has secured early round funding to substantially de-risk the projects.  We see the stock trading well as the projects approach their final investment decisions.

So, in summary, we like Woodside given its attractive valuation, balance sheet and growth profile. If it plays out how we expect we see plenty of 'blue skies' ahead!

 

So we 'Prost' Stocktoberfest with...

Blue Sky IPA by Sunshine Brewery (Kuluin QLD, Australia)

 

Written by Adam Alexander and Ben Chan

 

Further insights 

Our objective is to provide investors with capital growth, attractive risk-adjusted returns and stable distributions over the medium to long-term through exposure to quality Australian equities that are well positioned to deliver sustainable earnings growth and returns on capital. Find out more

 

Disclaimer: The above is general information only and does not consider any particular investor’s circumstances. It is based on the opinion of the author alone and is not intended to be a research report.  The information should not be relied upon to make an investment decision without seeking further information and/or advice from a financial adviser and considering whether any investment is appropriate in the circumstances.  Funds or portfolios managed by entities within the Evans Dixon Limited group of companies hold WPL.ASX.



Comments

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Captain Winklewand

Thanks for the article Adam. I like WPL too. Have you looked into Gazprom at all? They will also geographically benefit from China's increase in demand and should finish their "Power of Siberia" pipeline into NE China, during 2019. http://www.gazprom.com/press/news/2018/july/article446731/ However there is a lot of political risk with Gazprom, which weighs the stock down. But another good Co., alongside WPL, to hold for the long term (I think).