WPL international gas project turning to lead

Woodside’s Leviathan project off the coast of Israel is under a cloud as its two major joint venture partners look at alternatives.

- Growth or income play

- Questions remain around its international programmes

- First support: $37.30, Second support: $36.63, Resistance: $39.24 

WPL’s partners are looking for alternatives to their preferred method of transport by liquefying the gas for shipment in an LNG format in the form of gas pipelines. The news of pipelines will put WPL into less than favourable terms on a non-binding agreement it signed in December last year, which would see WPL taking a 30% stake and operating an export LNG project.

This change of tact from Noble Energy and Delek Group will put this setup into question and will significantly reduce the internal rate of return WPL will get from the project. It would reduce Woodside's involvement and could lead to the renegotiation of the agreement on less favourable terms.

For a company which is now being accused of being ex-growth, with the giant Pluto project complete and the Browse project at James Price Point put on hold, this deal is under even more strain.

WPL’s international expansion has been questioned since it picked up the Leviathan project. Majority shareholder Royal Dutch Shell has several significant assets in the Arab Sea and in the Gulf which has created geo-political tensions with Israel and between the two companies and has led Shell to question its investment in the company.

Shell is a known seller of WPL at $43.00 and $43.50, having exited the stock on the market in 2011 and 2012 at these prices, which does place a very strong cap on appreciation. However this hasn’t stopped WPL breaking out of a long-term resistance level around $38 as income investors pile into the company as the board looks to increase is payout ratio to 85%.

This change of direction has also changed the fundamentals of investors in WPL. We see WPL as an emerging income play considering the revenue stream coming out of Pluto and the plan to upgrade its payout ratio versus its previous rating of a cyclical growth stock developing mass projects.

If the Leviathan project cannot be renegotiated, could the remaining $1.2 billion set aside on the balance sheet for the project be returned to shareholders? If this is the case we will see a break above the resistance level of $39.24 – the two year high. We don’t see that happening in the interim and therefore believe the stock will ease on the news and could test the $37 mark over the coming days if the deal is lost.

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