New analysis: risky rate of return for Woodside Mexican oil project
The Australasian Centre for Corporate Responsibility (ACCR) has today released new analysis on Woodside’s Trion project - a greenfield deep-water oil development in the Gulf of Mexico.
In its 2022 Annual Report released this week, Woodside indicated it is pushing ahead with Trion and targeting FID this year.
ACCR built an emissions and free cash flow forecast to assess the viability of Trion.
Key findings include:
- Even when valuing Trion based on an Internal Rate of Return (IRR) - which does not adjust for country risk - the project does not meet Woodside’s hurdle target of >15% for offshore oil projects.
- When adjusting for country risk, the Discounted Cash Flow (DCF) valuation suggests a limited upside of $A0.23-0.35 per share or around 1% of Woodside’s market capitalisation.
- Trion is further exposed to material downside risks not fully captured in either the IRR or DCF valuation, including:
- Partner risk. Joint venture partner, Pemex (WDS 60% / Pemex 40%) has a poor financial, safety and operating record and has faced allegations of past corruption
- Capital expenditure risk. Ambiguity in the disclosed capital costs, specifically the carrying amount that Woodside will need to fund for Pemex.
- Production risk. The valuation is based on contingent resources rather than reserves. Also, the Gulf of Mexico faces extreme weather events that can reduce production, and these will escalate under climate change.
- Trion’s emissions (scope 1, 2 & 3) represent around 24% of the total emissions for Woodside in 2021 and an estimated 12% of the total emissions for the new combined entity of Woodside and BHP Petroleum.
Commenting on the analysis, Alex Hillman, Lead Analyst at the Australasian Centre for Corporate Responsibility (ACCR) said:
“It is difficult to see how shareholders win from Woodside spending US$4.6 billion on Trion. The project has weak economics, high emissions and a constellation of material downside risks.
“The IRR for Trion does not meet Woodside’s own hurdle rates for offshore oil projects.
“Trion has a long list of risks, several of which are new to Woodside’s portfolio. The joint venture partner, Pemex has a chequered operating, safety and financial record and has faced allegations of past corruption. Woodside has not previously operated in Mexico and oil and gas production in the Gulf of Mexico is being increasingly impacted by escalating climate impacts.
“Woodside has better options to offer investors than the pursuit of projects like Trion with a poor risk/return profile. Alternative uses of this capital, like increased new energy spend or share buybacks, are all options that should be on the table.
“Half of investors called on Woodside to set scope 3 targets in 2020 and then voted against last year’s Climate Report in part because it didn’t include scope 3 targets. Despite being economically marginal, Trion is a high emissions project that will increase Woodside’s scope 3 emissions into the 2060s. Trion would be another nail in the coffin of any pretence that Woodside is listening to investors on climate risk management.
“It really begs the question: what is going on at Woodside? Investors need to see some agility in thinking from Woodside’s board. And if they can’t do this, how can they justify to investors that they deserve to be re-elected?”