Woodside (ASX: WDS) announced a sale of a 10% interest in the Scarborough gas field. Located 375 km off the coast of Western Australia and connected to the shore via a 430 km pipeline the project is expected to begin production in 2026.

Our fair value estimate for shares in no-moat Woodside is unchanged at $45. Morningstar Senior Equity Analyst Mark Taylor views the announced sale of a 10% interest in Scarborough to LNG Japan as value-affirming. The market appears to have taken a mildly positive initial view as Woodside shares were up 0.6% following the announcement on a day when other oil and gas companies were generally lower.

In addition to further enhancing Woodside’s balance sheet, the deal also sees LNG Japan enter into a nonbinding agreement to purchase about 0.9 million metric tons per year of liquefied natural gas for 10 years from 2026, when the first Pluto Train 2/Scarborough LNG shipments are still anticipated. This further reduces risk around offtake for the 5.0 million metric-ton-per-year project.

Woodside’s balance sheet was in a net cash position at end-December 2022 and we expect it to remain essentially ungeared throughout the Pluto Train 2/Scarborough construction period. At the last count Scarborough/Pluto Train 2 construction was almost 40% complete.

A transaction has been coming for a long time, with Woodside marking out its intention to sell down part interest in Scarborough well over a year ago. Back then it hinted up to a 30% interest might be sold.

However, Taylor believes 10% is adequate, bringing Woodside’s Scarborough stake to 90%, in line with its interest in the foundation Pluto LNG project. The purchase price is $500 million USD, in addition to reimbursement for LNG Japan’s share of past Scarborough expenditures. This is estimated to bring the total consideration to a fair $880 million USD. The transaction is expected to be completed in fourth-quarter 2024, subject to the Foreign Investment Review Board and other regulatory approvals.

Woodside shares are up more than 15% from $33 March 2023 lows. At the current price of around $38.29 Taylor believes the shares remain materially undervalued as they trade in 4-star territory at a 15% discount to the fair value.