Woodside Energy Group Ltd (WDS) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the 2016 Half-Year Presentation. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session [Operator Instructions]. I must advice you this conference is being recorded today, Friday 19, August, 2016. I would like to hand the conference over to your first speaker today, Managing Director and CEO, Mr. Peter Coleman. Thank you, sir. Please go ahead.

Good morning everybody, and thanks for joining us for our 2016 half-year results. As you would've seen this morning, we released our half-year statement report and slide pack to the ASX. These include details of our key financial and business achievements for the half. Joining me this morning on our call is our Chief Financial Officer, Lawrie Tremaine, and for the first time in the call, our Chief Operations Officer, Mike Utsler. Mike will be providing an overview of our business activities this morning. As we've done in previous years, we'll make some introductory remarks before opening the call up to a question-and-answer session. If I can I'll note the disclaimers on page two, I know you read that in lots of detail, and then move on to slide three. You'll see that the focus for us has been on operational excellence, managing risk and volatility, and building near-term value growth across the business. We've increased our 2016 production guidance from a range of 86 million to 93 million barrels of oil equivalent up to 90 million to 95 million barrels, supported by a very strong first half production of just under 46 million barrels of oil equivalent, which is 9% higher than [technical difficulty] 2015. Our unit production cost of $5.20 per barrel was 38% lower than the same time last year, driven by operational efficiencies and higher facility throughput combined with an absence of turnarounds. Our focus is on managing risk and volatility, while -- by creating certainty where it's practical. We're targeting for 85% to 90% of expected 2017-18 LNG production to be committed under term contracts, and we're currently extending our debt maturity profile and capacity. In addition to near-term production from Wheatstone, Persephone, Greater Western Flank 2, and Greater Enfield, we continue to capture and build growth, highlighted by the back-to-back discoveries earlier this year in Myanmar, and the proposed acquisition of ConocoPhillips' interest in Senegal. On slide four, our net profit after-tax for the first half of 2016 was $340 million and our operating cash flow more than $1.2 billion. The profit result was down almost 50% on first-half 2015 driven by lower oil prices, partly supported by better production and cost performance. Our interim dividend for the half is $0.34 per share, and that's of course U.S. cents per share. On slide five, Woodside continues to focus on long-term performance, and is delivering peer-leading results across some of the key financial metrics, and here we've plotted EBITDA margins and return on average capital employed. On side six, the chart really shows that the oil market is beginning to rebalance. As we indicated, we felt it would earlier this year. In this environment we're continuing to look for business opportunities as competitors retreat to onshore U.S. international assets are sold and project investment decisions are being deferred. On slide seven, you can see a change is happening in the LNG market as new LNG buyers are emerging as prices reduce in floating storage and re-gasification units become commonplace. With more than -- with nearly 40 million tons per annum of future production deferred since the beginning of this year, we remain of the view that new supply will need to be sanctioned from 2018 onwards to meet market demand from the mid-2020s. I'll end for now on slide eight. And you can see in addition to our strong base, we have significant near-term value growth. We're currently developing more than 400 million barrels of oil equivalent, with production to commence from next year through to 2019. Our competitive position in Myanmar provides us with substantial resource potential that is located close to existing infrastructure and assets. And additionally, we're excited about our high impact expiration drilling prospects, and continue to pursue appropriate M&A activities. With regard to M&A activity, you can expect that we will pursue acquisitions that match and complement our capabilities, technology, and regional focus areas. Lawrie will now talk about our financials in more detail before he hands over to Mike to cover some of the business activities. Over to you, Lawrie.

Thanks, Peter, and good morning everyone. I'll start with our profit breach on slide 10. Oil price had a significant impact on profit in the first half; however the full impact has been partially mitigated by the quality of our LNG contract portfolio and strong business performance. Average realized prices were 26% lower than the first half of 2015, whilst the Japan Custom-cleared price was as much as 46% lower over the same period. This demonstrates the quality of our LNG contracts. First-half production volumes were 9% higher, as shown on slide 11. Aside from the timing impacts of major LNG plant turnarounds, facility utilization was the major driver of this strong result. Capacity increases and proved reliability, particularly at Pluto, contributed 2.5 million barrel of oil equivalent increase in production. Pluto reliability has been outstanding. We've only had two minor trips in the past 12 months, a great result for a single-train facility. Pluto capacity is outperforming our assumptions at FID. An example of how we have achieved this is vibration management. We've added additional pricing in strategic areas of the plant to reduce vibration and handling the plant to operate at higher rates. As Peter has mentioned, the strong first half results has enabled us to lift our full-year production guidance range. Taking a closer look on Pluto on slide 12, after adjusting for the additional costs associated with the Pluto turnaround in 2015, our production costs have continued to decline year-on-year. At FID, we assumed our unit production costs would stabilize at around $5 per barrel of oil equivalent. We achieved this target within three years of start-up and have continued to deliver efficiency since. The implementation of a technology-enabled project-based operational support center is an example of an initiative which helps to deliver the $3 a unit production costs achieved in the first half. Moving to slide 13, this chart compares our production costs and average realized prices with that of our peers. Our low production costs and high realized prices are delivering peer leading margins and explains the resilience of our business in the current market environment. As shown on slide 14, our strong margins in the first half resulted in cash from operations of $1.1 billion which funded our investment spending and delivered $160 million of free cash flow. The Wheatsone development was the largest component of investment spent in the first half, Mike will provide an update on progress on Wheatstone in his presentation. Next the slide 15, we have maintained gearing at 23% well within our target range, we continue to fund investment through the strength of our balance sheet and operating cash flows while the majority of our peers have either curtailed investment or have much higher gearing. As Peter mentioned one of our key achievements in the first half was managing risk and volatility; both in our balance sheet and our revenue stream. On slide 16, you can see our progress on extending debt maturities and managing liquidity. We have secured over $600 million in funding, diversified our funding sources and maintained a portfolio of debt below 3% at June. We had liquidity of $2 billion. Our BBB+ and Baa1 credit ratings were reaffirmed during the first half. Slide 17, provides an update on our LNG contracting position, our objective is to reduce our spot exposure on Pluto and North West Shelf volumes to between 10% and 15%. The shaded section of the chart indicates new mid-term contract close to finalization. An equivalent volume is under negotiation and is also expected to finalize by year-end. Finally, there has been some misunderstanding of the risk associated with buyers taking lower volume under LNG sales contract, this flexibility is referred to as the downward quantity tolerance, in practice DQT is used in frequently and only for operational reasons. In the first half of 2016, less than 1% of our volumes were impacted by our DQTs. With that quick summary of our financial performance, I will pass to Mike to provide a review of our growth activity.

Thanks, Lawrie, and good morning everyone. It's my pleasure to be able to take you through some of the key business activities that are ongoing for us. I'll start with slide 19, and review of Wheatstone. Wheatstone consist of essentially three major areas of activities, the drilling and completions and development of the reservoirs, which are now essentially complete. The installation and tie-back of the offshore central processing facility which is ongoing, and a construction onshore two LNG facilities, a domgas facility and the loading jetties associated with that operation. The onshore LNG train 1 all the modules are on site and work is progressing to enable first LNG cargos to be loaded mid-2017. The export jetties and LNG loading platforms are complete and train 2 LNG is expected to be completed six months to eight months following mid 2017 for the schedule. We continue to work very closely with Bechtel and the operator and sharing our construction, our commissioning and our start-up expertise by seconding people and sharing our learnings and experiences associated with that. I will now move to slide 20 and a review of Greater Enfield. Just prior to the end of the first half of 2016, Woodside and our joint venture partner Mitsui approved this exciting project. It's leveraging our technologies, the lower cost market capabilities and existing infrastructure to enable us to drill and complete 12 wells, the subsea tieback using multi-phase pumping, our capacity to connect to the existing Ngujima-Yin FPSO. This will enable us to develop 41 million barrels of oil, Woodside share, and demonstrates an ability to significantly reduce the incremental cash cost in developing and producing these resources. We' re planning for first oil in mid 2019 with the Woodside share expected to be greater than 24,000 barrels of oil a day post ramp up. Now, I will move to 21 and look at Myanmar. Again an exciting area for our opportunity set. Two exciting discoveries as Peter referenced, made in late 2015, early 2016, has identified 2.4 trillion cubic feet of gas discovery to date. We're looking at how we can access and pursue options to commercialize these discoveries. We are processing and evaluating currently more than 31,500 km of newly acquired high quality seismic data across this basin. And we're preparing for drilling campaign in 2017 with our JV partners and the Myanmar government. We have a significant and well positioned offshore acreage position in this portfolio, and we see this as an exciting and significant emerging basin. As I move to slide 22, we'll take a look at Senegal. Subsequent to the first half, we entered into a $350 million agreement to acquire 100% of ConocoPhillips shares in the COP Senegal B.V. This company holds a 35% stake in the recognized world class oil discovery known as the SNE field. This acquisition is subject to the Senegal government approval. And while this acquisition is a great example, we believe Woodside delivering on our commitments that we've made to secure positions in material and quality frontier and emerging basins in our defined focus areas. I think importantly this has been possible due to the fact that we bring and are recognized for bringing our technical capabilities and expertise in deep water drilling, in subsea developments and operating experiences, in our FPSO operating experiences, and our proven HSE track records in challenging environments. This combined with the financial strength and fiscal discipline, gives us the opportunity to be a partner of choice in supporting the development of this opportunity. And finally on slide 23, we've been able to accomplish a significant rebalancing of our global exploration portfolio since 2012. As this slide depicts, our portfolio has moved from 25% oil to now being 47 plus percent oil based and significantly refocusing where we are looking into emerging and frontier basins. We've leveraged our capabilities in meeting our stated objectives. And we expect those capabilities to enable us to have a greater than 25% commercial discovery success rate across our portfolio, to look at replacing a 120% of our annual yearly production, and to be able to deliver a finding cost of $3 per BOE, this while we continually high grade our portfolio drillable exploration opportunities. I think as you can see from these activities, we're strongly leveraging our capabilities as a company. We're capturing and executing new opportunities, and we have an exciting set of growth opportunities in front of you. Thank you for your time, and I'll now hand it back to Peter to close.

Thanks, Mike. Just ramping up on slide 24, you can see the focus here has been three areas. It's really operational excellence, that's continuous improvements squeezing the business, maximizing the value of our existing asset base. Secondly, managing risk in volatility where practical and we focus both on the revenue side of that equation, but also on our funding side, and it's not just funding to allow us to survive through what's been a very volatile period. The important funding base that's allowed us to take opportunities that have come our way as commodity prices have been low and set ourselves up for really what's an exciting future of growth, and of course, focusing on building that near-term value growth. We recognize that a number of our assets were long-dated in growth profile. You can see we are working hard now to bring near-term growth forward. We have too assets already underway -- under development; one being Wheatstone, the other being Greater Enfield. We look forward to joining the SNE joint venture that will bring additional growth into that five-year window for us. So with that as an introduction, I'll start with Q&A.

Thank you, sir. [Operator Instructions] Your first question comes from the line of Dale Koenders from Citigroup. Please ask your question.

Good morning, gentlemen. Just a couple of quick questions, firstly, on your production guidance. Could you provide a bit of color as to what areas you're seeing that upside? I guess, in the start [ph] you sort of gave a breakdown between LNG, domgas, liquids, and Canada. Could you maybe indicate where that's coming from?

Yes. As Lawrie stated, first of all, we see the improvements in reliability delivering greater LNG volumes from both Pluto and from the North West Shelf operations. We are seeing increased delivery out of our Kitimat operations with regards to the gas wells producing into the domestic grid there, but overall it's predominantly from our associated LNG production.

Okay. And then in terms of, I guess some questions on the costs. Production costs down $100 million versus first-half '15, I know half of that is obviously from Pluto workovers, but where are you seeing that cost out in your asset base?

Dale, it's Lawrie. So, there are a huge number of factors are impacting our cost. Obviously, we don't have the Balnaves facility operating, and we don't have Laminaria-Corallina. And so, if you're doing a first-half-on-first-half comparison you first have to take that into account. Obviously you've seen though a consistent cost down trend now over the last three years driven by all of the initiatives that we've talked about over that time, and also supported by production increases. So when you talk about unit cost that's obviously been a significant factor as well. So you shouldn't be surprised, and I guess we've been working towards this 2016 result for three years now.

Dale, it's Peter. I'd probably add to that. We do have a couple of study [ph] costs that are coming through at the corporate level this year that will washout of our future costs as well. So to kind of balance some of Lawrie's comments about the fact that we've had some assets leave the asset mix. Equally we've had a couple of studies that we were previously committed to completely, both at Grassy Point, and with Sempra at Port Arthur that will be completed in early second-half. And so some of those costs will naturally washout of the system as those activities…

That was the next question. And corporate costs are quite high. What is the right level on an ongoing basis?

Yes, that's right. So we've got a couple of studies in there that will washout in second-half. And we expect to mean a much lower cost base as we go forward into 2017.

Okay. And final question, just the other costs, line item was quite high as well, which I know includes FX gains and losses. Can you provide a bit of color as to sort of what was in that number?

Yes, there is some FX in there, Dale, and also some fair value adjustments, particularly relating to some housing. So we're revalued some housing.

So should we think about most of that other cost being non-cash?

I would consider it as being -- we're cancelled against saying non-recurring, but I wouldn't expect it to be that same level going forward; put it that way.

Thank you very much.

Dale, the message there is we looked at our housing stock up in Karratha, and have chosen to revalue the base of that housing stock over the period based on our expectations of future use. And so you're seeing that come through in the first-half numbers. So where Lawrie's reluctance to say it's non-recurring, but it's certainly the first time it's occurred since I've been with Woodside. So if that's non-recurring it's non-recurring. And as, obviously, the valuation was unfortunately triggered at the bottom of the market up there, but nonetheless we think it's an appropriate valuation of those assets.

Okay, very good. Thanks so much.

Your next question comes from the line of James Redfern from Merrill Lynch. Please ask your question.

Good morning everyone. Just the first question is on offshore Senegal. The transactions you would complete end of the year, just wondering how much insight you've got into when we could expect FID? I mean, Ken [ph] talking about targeting FID mid-2019, but is there any scope to bring that forward given the successful drill results to date? And then the second question is around LNG contracting. You're saying that you're targeting 85% to 90% of expected production under term take-or-pay contracts. So does that mean that you are not necessarily too concerned about trying to re-contract those volumes running off at Pluto next year, the two mid-term contracts that are expiring in April? Thanks.

Okay, James, firstly on Senegal. I think it would be a little presumptuous for us to make comment on where the joint venture thinks they are on FID. Although I would suggest to you there's probably two steps that the joint venture will go through. The first one is taking a really good look at entire acreage position and understanding exactly what is required to delineate the full resource opportunity within the acreage. And Ken [ph] mentioned in their update earlier this week. In fact, I thought there was a fairly significant undiscovered resource opportunity there within the existing acreage. So we have to get into the joint venture and really understand where their position is. Having said that, our view is supportive of that position, and so I won't say we'll be diametrically opposed, but we're just simply working out what's the best plan of calling commerciality on the existing discovery or -- and delineating that further or do we put our efforts into further exploration and delineation of the resource potential in the blocks. So they're the issues that we'll be dealing with. We hope to close on this by the end of the year, but obviously we're hoping to be in the joint venture a lot sooner than that. ConocoPhillips are working through the closing process. And as we mentioned, the final part of that is the approval by the Senegalese government, and we expect that to be forthcoming. There's nothing where we're off at the moment that would slow down that process. On LNG contracting, the Pluto contracts, the mid-terms that roll off next year. Yes, they're in those target numbers that we're saying that we'll put back into term. And so we're looking at whether that will come through a portfolio sale or whether that will be a direct sale out of Pluto. But that's certainly -- those volumes are certainly in the mix for us to deal with next year.

Thank you. So we should expect an announcement over the next, say, six months in relation to re-contracting those volumes?

They're in that mix of numbers. So, whether it's specifically those volumes or other volumes, but they're in the total mix. So for us LNG is LNG. And once it gets on the ship, as you know, we just hold on a heating value basis. So in the total portfolio, when you look at the mix, it'll be a mix of Pluto, it'll be a mix of other equity volumes that we have. Noting James, there's been a change since the first of July. Of course, we now get the opportunity to sell equity volumes out of the North West Shelf that previously weren't available for us to put into our portfolio. So there is additional opportunity for us with respect to mix coming forward.

Okay, great.

James, whether we disclose any particular contract just depends on its materiality. And as you can see from slide 17 in our pack, we're looking at a number of sort of mid-term contacts of -- we talk about 12 to 20 cargos over that 2017 to 2019 period. So depending on how that falls out, any given outcome might be material or it may not be. So we won't necessarily individually disclose. However, given that we've provided this chart a couple of times now we're likely to update it periodically in the future.

Okay, great. Okay, Pete and Lawrie, thank you very much.

Your next question comes from the line of John Hirjee from Deutsche Bank. Please ask your question.

Good morning everyone. I have a few questions also asking about the cost line. I'm referring to your slide 29 in your appendix slides. And wanted to sort of get an understanding of the gas production costs which have materially stepped down by about 38% from the averages of the previous numbers you quote there. I guess question, Mike, is do you think that's sustainable? And at $3.40, I think you quote there, per unit, is that sustainable going forward in terms of the gas business that you currently operate?

Yes, we do, James. We have confidence in the nature of our work operations -- or John, excuse me. We have confidence in our operations and the planning processes that we've implemented to drive core campaign and integrated annual turnaround activities that are underpinning this.

Right, so -- but obviously with Wheatstone starting up you'll have some impact there from the startup costs. But you think that from your current foundation legacy assets, I guess, that $3.40 is a sustainable number?

Look, I don't want to lock us in to a forecast of a particular number. But I think if I were you I would look at the trend, and bearing in mind, if you look at $3 at Pluto, that's a pretty low number. And I think it will be difficult to replicate each period. And it also reflects -- the Pluto number, for example, reflects the fact there the major shutdown was in '15, not in '16. So of course it'll vary depending on the timing of shutdowns, and how many major shutdowns we have in any given year. But the trend is the important bit of information.

John, I'm a little more positive. The -- a couple of things had happened at Pluto. Firstly with respect to is this sustainable, yes it is. And the reason for that is we're doing the things that we should do. So these results and we've said this consistently, are on the back-half continuing to do the maintenance programs that we said we would, ensuring that the work that is required to keep these assets at their very best is being done in a proper way. So these results have not been achieved through deferring things. And you won't see a bank of activities come at you in two or three years time, when we come and apologize for not having done things that we should've done. So we have not walked away from our principles; that these assets must be maintained, and must be maintained in the highest integrity. With respect to the timing of turnarounds and so forth Lawrie mentioned, one of the good things that Mike and his team have been able to achieve is extending the turnaround period on Pluto. And we've extended that now from three years to four years. So one of the things that is important in these results, as you're looking at dollar averaging over periods of time, is that we've actually now taken what was a very substantial turnaround out of our base, and being able to move it out by a year. Or really that's -- either depend on what denominator you use. So that's either a 33% or a 25% extension of that period of time. Now, I'd say the results are on a very sound financial and operating base. We continue to focus on them. As Lawrie said, there'll be some fluctuations depending on turnaround timing. But I don't expect these to bump up at all. The challenge for us is can we continue the downward trend, and where is the bottom. Mike tells me we haven't found the bottom yet, but we're obviously going to continue to work towards that.

Sure, okay. Well, nonetheless those cost reductions are very impressive. Could I ask a question on your trading operations? Again, you give a slide in your appendix slides of 32. I just wanted to understand the reconciliation in deriving your gross profit from trading, about the optimization opportunities and exercising the seller options. Could you give us some examples of those? And you've quantified them there in this particular example, so I just wanted to get an idea of what those actually are?

All right, John, we've talked for a little time now about benefits from our trading business back in to our core businesses of Pluto, in particular, but in the future also North West Shelf. What we've tried to do is isolate a trading result which takes into account outcomes from sales that exceed what the business would normally expect. So for example, if Pluto is out-produced as they did in the first-half, so produced more than we planned for, then we've allocated a spot price equivalent into the Pluto business segment, and taken any incremental value generated by that transaction, and reported in the trading segment. So I think that's the best and simplest example I can provide you, but as you can imagine, in a world where we are looking for geographic swaps, for examples, other examples could get much more complicated.

Sure. But I guess prima facie, it looks as though if you -- other than those optimization opportunities you've highlighted, you are actually buying and selling LNG at a loss. Is that fair? Or, the trading unrepresented what you highlight here?

Yes. Generally, we wouldn't expect to make a loss on any buy resale which is what reported in that third party trading line. More likely to be a small amount of overhead associated with the business, but more particularly, shipping cost. So John, if you would recall, we've got a couple of ships in this fleet. One of them has a legacy of what I would say 2013-2014 operating cost associated with it.

Yes.

As so as the shipping rates fell down, of course -- the ships are also used to move third-party cargos. As the shipping rates have fallen down to historic lows, of course, we are bearing a loss on that particular vessel. The latest of our vessels the one that came into fleet early this year is actually trading slightly positively because in fact we negotiated a much lower rate for that. And the new vessel that comes in, in the beginning of next year is also has similar very low rates on it. So, it's just really one of the vessels that was a legacy vessel from that 2013 is trading at those higher rates.

Okay. Yes, I see. And finally a question, I guess, Lawrie, for you, we appreciate your RRC guidance that you give us, but do you expect to see continual benefit from RRC going forward, or -- we know it's bit of a black box, but what's your expectation?

I am glad you appreciate it's a bit of a black box, but generally speaking, the benefits are driven by augmentation, and whilst oil prices are low, the augmentation tends to exceed -- I'd say that's accessible on margins from FID assets. So the short answer is in the short-to-medium term, yes.

You don't want to give us guidance as to what oil prices triggers, where it goes into [indiscernible]?

I can't give that guidance because I don't know specifically the answer. This area, we keep promising you and we will deliver some more guidance on paid up lots, but particularly augmentation to help you forecast more readily. Obviously, the ability to do that means you need understand the position of our un-deducted cost buys at any point in time. So, we'll see if we can help you more with that.

All right, I'll probably have to write thesis on it, but anyway thank you very much.

John, it is a complicated situation, I agree, but if the complication is [indiscernible] in the lower side.

Sure. Thank you. Thanks very much.

Your next question comes from line of Mark Samter from Credit Suisse. Please ask the question.

Yes, good morning guys. Just a question of clarity on the DQT statement, I mean, I guess LNG is broadly two-thirds of production, contracted broadly 80% of that, so that your contracted LNG is about 50% of production. Should we read 5% DQT being of total production and therefore it's 10% of contracted volumes, or it's 5% of contracted volumes?

The way I put it in my presentation, I think is the correct way and that the DQT is roughly - the highest potential DQT is around about 5% of production and so total output if you like. But as I say it, that really DQT exist for operational to deal -- to deal with operational issues, not to deal with portfolio flexibility for buyers. And therefore, the actual experience of DQT has been around about 1%, but a bit less than 1% recently, but I focused on the first-half, obviously because it's relevant to this presentation, but in fact around about 1% has been a historic average as well.

Yes, I mean, there have been bad times, maybe it was decade or so ago. I think one of the Japanese [indiscernible] certainly a lot of the other companies are saying they fully expect DQT to be realized as you say it, it's theoretically only operationally but LNG contracts are a lot about.

Yes, yes, Mark, it's Peter. It's an interesting question as you look at your buyer base and so forth. Look the only guidance we can give you is behavior advice, historically and what we are seeing with them today and the relationship with buyers at the North West Shelf is still very strong and you saw that as part of the price reviews, in fact we saw in increase in prices out of the recent review. So those buyers are very much honoring both the terms of the contract and also spirit of the contract that they have and they are taking their quantities with respect to the Pluto buyers, well of course the exposure there for us, as we talked about is mid-term next year and we fully expect that or we are targeting to break contract most if not all of those volumes by the time that they roll off. So we do recognize that there may be buyers out there in the market that are thinking of exercising do DQT not necessarily in the spirit of the contract but we don't see that amongst our buyer group. So what may or may not happening elsewhere in the marketplace we watch that, but the only guidance I can give you is, there is absolutely no indication within our buyer group that anybody is considering doing that. So the numbers we provided you are the facts and I think we just, we all just need to make a judgment of where we think they go.

I mean, presumably fair to say, currently contracts spot prices pretty close to contract price, it's fair to say, you would expect both [indiscernible] and probably with spot LNG market, as those conversation get harder next year, I am curious if there is any further, you got any further thoughts, price speculation about Japanese pushing or challenging the legality of the destination restriction, all of these things as a quid pro quo 2017 probably looks like a harder year for conservation to the customer about these things is that fair?

No. Look, I say those conversations are about destination of course it come up from time to time. So it's not the first time that the destination quotes has come up as an issue, but equally with respect to opening up existing contracts [indiscernible] law change, the Japanese customers have been good in understanding that, when these quotes are put in, there is something else that was also given on the other side. So, this is a bilateral negotiation and you can't just pick on, one part of the contract and say I don't like that, because often it was traded against something else in the contract that the seller gave up and so you start going down that path and then you start to look and say does the contract itself, still deliver equitably amongst the parties. So, I just don't see a trigger for that occurring to be honest, unless there is a law change and of course then we have to respond to law changes with respect to new contracts coming into the market. I expect that those destination causes will come under negotiation and some scrutiny. So on a going forward basis, I think it's going to be quite difficult to get destination quotes as being contracts and that's just a natural evolution of the market and the formation of Jiro [ph] is a pretty strong signal that the Japanese buyers are heading in that direction.

So just one last if I can, again I apologize I couldn't get onto the call, you might have mentioned this already, with the mid-term sales, I appreciate you don't have to give us a price, but we should be thinking of those as closer to a spot price or closer to a long-term contract price.

Obviously you got a contract thing, where the market is today. So we are being fortunate, we got some legacy contracts, so it's all about dollar averaging, we got some legacy contracts, that were contracted at a different point in the market this -- all I can say is what we are contracting today reflect where the market is, we obviously try and get the best deals we can but, they will reflect market pricing, we are not a distress seller though into the market, that's the advantage we have of our portfolio and trading activity and also having to follow that shipping. So as we go into these conversations we are not a distress seller in the marketplace. So in that regard, all I could say is, I think we are getting competitive pricing. Just one thing to remind us, we are still seeing the formulas linked to oil price. So there has been some speculation over time that there will be a move away from oil pricing. In fact, in all of the contracts, we are negotiating at the moment. There is still a strong linkage to oil price in those contracts.

Okay, I really sneak in one final, final quick question, if I can. Just with Gorgon made a relatively inauspicious start to produce light, presuming there is nothing of any concerns and that cause any issues with thinking about Wheatstone things that have been done the same way.

Look, Mike would love to jump in and give you more on it. But I will try and cut it short, two things I would point to and of course we are not across all of the - we don't understand Gorgon as well as we do Wheatstone, but the thing I would point to on Wheatstone Mark is, when the technology is the technology that is already well understood in Australia and we are just seeing three plants, start-up on the East Coast with the same technology. So Gorgon is a different technology as I am sure you are aware. So that gives us some confidence. We are seeing the Bechtel team start to -- what should I say, they are bringing people across from the East Coast that participated in those start-up. So that's important for us and then we are not seeing any issues at the moment. That would lead to believe that there will be any problem. We have put -- we are in the process of and we have already place people in the start-up team, start-up and commissioning team. It's something that we think that Woodside can add to that joint venture. And so, we are looking forward to pull a start-up there. They are working alongside with Bechtel people. And then finally, the operator is meeting their productivity targets that we collectively said at the beginning of this year and they are fairly tough targets that they set themselves. They are meeting now consistently meeting those targets that gives us some confidence both in schedule and costs.

Brilliant. Thank you. Third time lucky for Chevron hopefully.

We got our fingers crossed.

Thanks, guys.

Thanks.

Your next question comes from the line of Nik Burns of UBS. Please ask your question.

Thanks guys. Look, just another question on your LNG contracts; just note that between the investor briefing you are targeting 80% to 90% of expected production under contract, you have tweak that up marginally hit 85% to 90% just wondering is that uptick is that driven by - you have now got better line of sight on completion of some of these mid-term contracts or is that, does it reflect an increase in your desire to get more volumes under mid-term contracts?

It's a good question, Nik, and the answer is a little bit of both. So from a marketing point of view, the teams now have a much clear line of sight than we did during IBD, so it was -- we had these opportunities in front of us at IBD. They were immature at the time, so we were reluctant to put numbers in there that we couldn't meet. We now have a much clear line of sight and we are into final discussion on some of them, as we speak. So that's what we alluded to in the past, with respect to the percentage obviously as you get a clear line of sight to it, the CEO they want to ensure that our investors can see that we have got resilience both on the revenue stream and then on our financing stream. So two things we have been doing during the half is getting more predictability and resilience into the revenue stream, to take out some of that volatility that will come into the LNG market and we actually think there might be more volatility through 2017 as more volume come in. So we are trying to take that out to the extent we can. And then on the funding side of it, Lawrie mentioned, we have completed some funding arrangement stream first half we think at very competitive rates did manage to push 10 for us, so we are trying to move some, take advantage of where the market is, move some of the turnaround as well.

Okay, that's clear. And look, just a final question from me, just on -- you mentioned that these mid-term contracts, feature of them will, they will continue to be oil-linked, is a feature, I guess, one of the characteristics of your energy portfolio, is there a significant downside protection LRO process, should we assume that the new mid-term contracts are unlikely to have that feature?

Yes. Look, the only thing I can tell you, Nik, is the contracts will reflect where market is today. And so, what I would say is where market is today it's hard to get protection on either side of that. The buyer is still pretty involving with it. So, we will always look for those protections where we can, but I equally say it's difficult in this market environment.

Great. Thanks, Peter.

Thanks.

The next question comes from line of Andrew Hutch from Macquarie. Please ask your question, Andrew.

Thanks. The only question I wanted to ask is the follow-up that you might have said it more at the beginning, it was just Ken obviously reported earlier on this, and talking about, I guess, disappointing for them at least in terms of numbers that's happening in Senegal. I just wanted to get little more clarity around how you guys are viewing it now and what your plan is for it going forward?

Sorry, Andrew, I read the Ken release. I'm not sure about the numbers you are talking about. The resource upgrade that Ken mentioned, or…

That's right, not quite I guess getting into the numbers that you also been talking about in the initial numbers there?

All right. No, look -- without, I haven't spoken again specifically about this matter, but the thing I would point to is, our numbers are consistent without the joint venture partners in SNA. And equally Ken had taken what I think is probably a conservative approach. You have seen their numbers consistently lag the updates in the other joint venture partner's numbers. So, I would rate what they have put in as positive by just seeing to have a slightly different process, but certainly when you look at the minimum economic field size, they are starting to put guidance out there that would be consistent without SNA and then also their plans for too many, I think, further the resource are very consistent with that as well. So, now when you look at the total resource size itself, how much oil is in the bucket? We have a similar view. I think, this is more than recovery factors and how many wells and so forth we may need to drill, and it's just Ken's own internal view is more conservative and the view we have taken, and the other partners in the joint venture. So, I wouldn't rate anything more into it than that.

Okay, fair enough. Thank you.

Yes.

Your next question comes from the line of Mark Wiseman from Goldman Sachs. Please ask the question.

Good morning, guys. Thanks for the update. You have really smashed the gas OPEC target. You have upgraded production guidance. It seems like a lot of the controllables in the base business, you have achieved a lot in the last few years, and I guess, the question is just around where is the next tranches of value that you see and as you sort of looking across your dashboard in the M&A markets, North West Shelf backfill exploration, where about do you sort of seeing that easiest tranche of value at the moment and where could this potentially come from in the next 12 months?

It's a good question, Mark, and obviously we are at a point here where we are looking at next two years and saying, "Yes, we did get ahead of the curve with respect to our production efficiency initiatives and our cost initiatives." And so, there is a point in time where they will flatten out, you can't anymore than 100% reliability out of an asset, like Mike is trying really hard. So we have been looking at that. Well, I think we are at a fortunate point when you look at with the guidance we have given is we said we had about a billion dollars of capacity within our current balance sheet to be outgoing [ph] this year; opportunistic M&A, and that was asset-based M&A. And I think SNA is a pretty good call on that. If you look at any of the numbers on that, SNA looks like a very attractive acquisition at the right point in the market for us, and it's long-term. So it's got enough in it that any uncertainties we have in it should be able to be managed through the economics cycle. It's a lot different. It's a smaller asset acquisition as you aware, you sail a little bit closer to the wind, and I would probably put our [indiscernible] acquisition with Apache into that bucket, where it was a small asset and unfortunately the reservoir did deliver like it needed to for us to make that asset work. So I think you can expect us to see more of SNE type opportunities coming in, obviously our preference is for oil, long date, I have already made some long dated guess, it's difficult to see, for us how that creates long-term value at this point in the cycle, although there maybe some opportunistic things. With respect to the North West Shelf, Canning, Exmouth Basin, our view is those -- the owners of those assets will be reviewing them over the next couple of years, as to what they do, we have a footprint in three of those four assets being North West Shelf, Pluto and now Wheatstone. We feel we are very well to take advantage of any asset movement that may occur in there and we will also benefactor of any tooling that will take place. So we are quite positive about where we think the backfill the North West Shelf will come from it's too early for us to give guidance on it, but we are starting to see line of sight now, in our view the assets that can come through North West Shelf and we will provide more guidance on that as we go through the year.

Got it. Thanks, Peter.

With no further questions at this time, I would like to hand the call back to Mr. Peter Coleman for closing remarks. Please continue.

Look, thanks everybody this morning for firstly your interest, I know there is so other reporting going on today and it's been a busy couple of days across the energy sector. I apologize everything just seem to pile up for us from a reporting point of view, but something we just can't avoid that. With respect to the messages I said up front, it's really about squeezing our existing assets, and Mike and his team being able to get the very, very most out of what is a world class asset base for us that's already developed. It's about extending the life of he those assets and we've talked about there is some opportunities, that we could start to see line of sight to extend the life of the existing asset base. We are pleased that's now starting to occur, it's about managing our revenue stream, making sure we not only maximize that stream, the value of that stream but also providing certainty around that with respect to volatility and the market to the extent we can and of course working on our funding, making sure our balance sheet remains in good shape to be not only fund our projects going forward but for us be able to take care of acquisition. And I think some of the comparisons we showed with respect to our peer group, where others are being forced to choosing to retreat in this part of the cycle. In fact, Woodside now being able to take advantage of our balance sheet capacity and make what we think is some really value adding acquisition. In addition to our portfolio and then finally of course we do have capacity to fund the decline that we have in our base and continue to grow. We are looking forward to working with Chevron and getting Wheatstone up there and making sure it is third time lucky with respect to moving those things forward. We are looking forward to getting some of the productivity out of Wheatstone that we are seeing in our other assets and sharing that with the operator. And then of course, Greater Enfield, as Mike mentioned, is a great example of taking advantage of the market conditions, but also picking the sweet spot in assets. On SNE, we look forward to working with the Government of Senegal, and of course ConocoPhillips to close that transaction and we think it fits nicely into the competencies that we have in deep water at PSOs and it gives us some oil back into our portfolio that is something that we are looking forward for some period of time. With respect to profit numbers and so forth, I think I remind you, there is a lag always in our pricing, so we are expecting our overall prices in the market to firm as we come through second half, we also expect some of the first -- obviously the first pricing effects to washout some of our LNG contracts in that period of time. So we are looking forward to keeping that cash flow going through, with respect to exposure for us in the business. Our exploration drilling program is complete this year, and we are looking forward to gearing it up for next year's program, but if you think about, we have cost exposure in our business, expiration is basically complete, our price mix is complete, so it's mainly [indiscernible] activity at this point in time as we go forward. Obviously, Wheatstone we are starting to see a ramp down now and the number of people at site at Wheatstone that site is delivering its productivity efficiencies that we are targeting. We now have Woodside people [indiscernible] into some key roles and start-up new commissioning team, and of course as Mike mentioned the Julimar Brunello development which Woodside is operated for, is essentially complete and is tied into the central processing facility. So, and then finally of course, we are committed to returning funds to our shareholders we have turned off the dividend reinvestment plan for this period the number of you may have question why we turned it on at the beginning of the year, of course there was a lot of volatility in the marketplace at that point in time, we did see opportunities coming forward for us. We made a choice to in some ways protect our balance sheet while providing us with the capacity to pursue opportunities, and we don't see the need to do that in our funding plans as we go out into the future. Of course, some of these market circumstances change for us, and so you can expect back to business as normal in at least in our forward projections. So that's where we are today. Thanks very much again for your interest in Woodside, and I look forward to catching -- Lawrie and I look forward to catching up with number of you next week, as we…

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.