Woodside Petroleum has agreed to sell a 49% stake in a proposed expansion of its Pluto liquefied natural gas facility in Western Australia to Global Infrastructure Partners.

Terms of the deal are based on the Pluto Train 2 project costing $5.6 billion to complete. The project will receive natural gas from the Scarborough field that will mostly be turned into liquefied natural gas. GIP will fund 49% of the capital expenditure for Pluto Train 2 and an additional $835 million of construction costs.

Woodside chief Executive Meg O'Neill says the sale of the interest in Pluto Train 2 is a "significant milestone" as the company processes toward a final investment decision on its Scarborough development.

The deal sets Pluto T2 up as a joint venture to be supported by a long-term processing and services agreement with the Scarborough gas joint venture. Scarborough is currently 100%-owned by the merging Woodside/BHP Petroleum. But that may change with a potential sell-down having been flagged for some time.

At this first juncture of the ownership reset, we believe valuation implications are essentially neutral. Woodside's (ASX: WPL) balance sheet will enjoy the US$2.8 billion in capital expenditure rehomed with GIP, and up to a total US$3.6 billion if it manages to avoid cost overruns on Pluto T2's construction. But the counter from a fair value perspective is the increased operating cost, given the processing fees that will now be paid to GIP over the life of the asset.

The proposed sell-down of equity in the Scarborough gas resource, located about 375 kilometres off the Western Australian coast, could be the next action with potential for valuation implications for Woodside. But the cost of the upstream Scarborough development was last pitched at US$6.3 billion on a 100% basis. And given that high up front capital expenditure in relation to project net present value, even were Woodside to effectively give equity away for zero, just allaying construction cost, we estimate the impact to our Woodside fair value estimate would be less than $1 per share. Our net present value for Scarborough/T2 (100% value of up- and downstream) is circa $2 per merged share.

Woodside shares have done little since the GIP announcement and at around $22.35 remain materially undervalued, in 5-star territory. We have recently hypothesised that conclusion to the Pluto equity sell-down process and a final investment decision on Scarborough may be required to change the market's sentiment. The first box on the list is now ticked and doesn't seem to have swayed market opinion. It remains to be seen whether Scarborough sell-down or final investment decision will move the sentiment needle.

Woodside says it remains on track for the final investment decision on the Scarborough and Pluto Train 2 developments before the end of this year. All major contracts and Commonwealth and Western Australian primary environmental approvals are in place, and commercial agreements are approaching finalisation. Timing of the equity sell-down is aligned with the targeted final investment decision.

We think Woodside will see even stronger average fourth-quarter prices than achieved in the third, given the one-quarter oil price lag in its LNG contracts. We continue to view natural gas as a vital primary fuel source in the energy transition to low carbon alternatives.