Huntleys' Stock of the Week

Recommendations: Buy

WPL's current stock prices

The Strong Get Stronger

Investment Rating:

As Australia's premier oil and gas play, WPL's operations encompass LNG, natural gas, condensate, crude oil and LPG. Forays into Africa, the US and the Middle East add an international complexion. LNG interests in the North West Shelf Joint Venture (NWSJV) offshore Western Australia are the mainstay. Production is forecast to grow strongly. The company delivers a reliable dividend stream and Shell's 34.3% stake adds spice. Well managed with a strong balance sheet, WPL is suitable for conservative investors seeking oil and gas exposure and stand-out long term growth. It represents a cornerstone energy exposure in a balanced portfolio.

Event:

• After falling from $70ps highs in May last year, WPL's share price for the past four months has meandered between $30 and $40. Yes, the oil price has plummeted, but the punishment doesn't fit the crime. Net debt reached $2.8bn at end December - net debt to equity over 40% - and WPL was lumped into the "tarnished by debt" basket. To do so misses a key point. WPL is investing heavily in its future, when all most resource companies can do is to stay afloat, BHP also an exception. It's a classic case of a strong company making quantum leaps while others are running on the spot. WPL should emerge from the credit crisis appreciably further ahead than many peers.

Impact:

• We retain our Buy recommendation on WPL. At the current share price, a prospective FY09 PE of 18 could fall to 12 by FY10 and fully franked yield from 3% to 4% on an assumed 50% payout. That assumes US$45 oil in FY09 and US$67.50 in FY10. We anticipate a strong up-tick in earnings in 2011 when Pluto Train 1 triples group equity LNG output. Our valuation is unchanged at $67.20ps on long term US$80/bbl oil, A$/US$ 0.80 exchange rate and a 10% discount rate.

• In the longer term still equity LNG output could rise five-fold if Browse and Sunrise are developed to three quarters or 150mmboe of total group hydrocarbon output of 200mmboe plus. That's in addition to the original NSWJV where WPL says there is room for three additional trains at Karatha for eight in total. The Greater Western Flank of the NWS with its favourably high liquids ratios is yet to be exploited.

• Where the market sees debt and risk, we see a company with the timing and foresight to grab the narrow window of opportunity and the flexibility to lay off associated risk later should it choose. We still see the value in energy assets. Chinese consumption continues to grow and remains well below first world levels.

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