(Adds S&P placing Woodside on negative credit watch)
By Ross Kelly
Of DOW JONES NEWSWIRES
SYDNEY (Dow Jones)
Woodside said in a statement the foundation cost of Pluto is likely to be 6%-10% above its original July 2007 estimate of A$11.2 billion due to "lower than budgeted productivity in both onshore and offshore construction". It also said the project is on schedule to ship LNG from its first production unit by early 2011.
Analysts are divided on whether Australia's biggest pure play oil and gas company will eventually tap the share market for funds, with much hinging on the progress of a planned expansion of Pluto beyond its foundation stage and the construction of two other LNG projects.
Chief Executive Don Voelte told reporters in Perth that Woodside has no immediate plans to raise equity but it may need to source more debt to cover the cost hike.
"We just don't look at the capital markets as a necessity at this point," Voelte said.
But in a bad sign for the company, ratings agency Standard & Poor's late on Friday placed its A- long term credit rating on Woodside on "CreditWatch with negative implications". A downgrade to Woodside's credit rating could increase the cost of its debt.
S&P said in a statement that it already had a negative outlook on Woodside and will aim to resolve the CreditWatch in the next two weeks after seeking to understand the company's response to the cost hike. Earlier, a spokesman for Woodside said there is no specific reason for the cost increase, which he said was wrapped up in general productivity issues. These could include progress of work such as drilling and welding activity on any given day, he said.
"After three months of peak construction, we now have a better handle of what we can expect going forward," the spokesman said, adding that the cost hike is largely based on expectations of upcoming spending.
While cost increases are never good and A$1.1 billion sounds like a lot of money, it's hardly cataclysmic for Woodside, considering the large size of the project and the fact that it's 82% complete, leaving less room for more nasty surprises.
"The project's still on schedule and compared to total capex of around A$12 billion, a 6%-10% increase is not all that bad," Gordon Ramsay, energy analyst at UBS, said.
LNG projects often experience cost blowouts and the market may have been anticipating one to occur at Pluto. At 0500 GMT, Woodside shares were down 2.8% compared with a 1.3% fall in the broader market.
Woodside is one of the few large companies on the S&P/ASX 200 that hasn't tapped equity investors for capital and analysts at JPMorgan estimated earlier this week that it may raise around A$3.5 billion from a combination of a capital raising and dividend underwrites - but only if it sanctions an expansion of Pluto to two production units by late 2010 as planned.
Woodside is also operator of the proposed Browse and Sunrise LNG projects, although, along with Pluto 2, these face hurdles ranging from gas supply issues to political risks.
UBS' Ramsay said it's a little too early to be certain on whether an equity raising will occur, with a final investment decision on the Pluto expansion at least a year away and Woodside still short on gas.
"And we'll have to look at the status of Browse and Sunrise as well," Ramsay said.
Pluto is one of about a dozen LNG projects planned in Australian and Papua New Guinea but only a few projects are currently under construction globally.
The proposed Exxon Mobil-led PNG LNG project last month increased its development cost estimate to US$15 billion from US$12.5 billion despite experiencing a better contracting environment amid a slowdown in global economic growth. It partly pinned the cost increase on an expansion of the project's planned capacity, the inclusion of pre-start up operating costs and the bringing forward of a drilling program for the second phase of the project.
Leading market commentators, such as BHP Billiton Ltd. (BHP.AU) Chief Executive Marius Kloppers and the Reserve Bank of Australia, have recently warned of a possible return of labor shortages in coming years with a pick up in demand for resources.
-By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com
(Stephen Bell in Perth contributed to this article)