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Woodside Petroleum – Oi-l, Oi-l, Oi-l

Looking for a yield stock with a pristine balance sheet, growth opportunities and cash flow coming out its ears? Welcome to oil and gas stock, Woodside Petroleum.

 

Whoever or whatever concocted the oil price plunge from above US$100 per barrel in September last year to below US$50/bbl in the space of four months probably did not have shareholder wealth and welfare at WPL the top of mind.

 

But the full year profit result presented by the company showed that despite the falling commodity price, it could generate a top drawer outcome for shareholders.

 

The full effect of the lower oil price has yet to feed into WPL’s FY15 result but the 17.5% lift in the price of Brent crude oil this month might suggest that it won’t be a bust after last year’s boom.

 

The company notes that its net profit sensitivity to a US$1 per barrel change in the price of Brent crude is approximately US$25 million. That is significantly more important than the US$5 million change in profit from a 1 cent shift in the Australian dollar to the US dollar.

 

Like every other business exposed to falling commodity prices, Woodside has acted quickly to reduce its operating cost base (a $560 million boost to FY14 with more to come in FY15) and to reduce its capital investment plans. Operating expenditure in FY15 will be about 15% lower and capex will be around 20% lower.

 

Woodside’s balance sheet is already in good shape boasting cash and undrawn facilities of US$6.8 billion compared to drawn debt of US$2.6 billion.

 

The 13% Wheatstone stake acquired from Apache late last year is due to complete on 31 March 2015 and that will snip US$2.75 billion from the kitty. We published a note on this important acquisition in December last year.

 

It positions Woodside nicely for the next few years where previously it looked problematic how it would fill the earnings gap between the start-up of Pluto LNG and the next big asset. Browse was originally the answer but it quickly became the problem as the cost of building the project at James Price Point sky-rocketed thanks partly to greedy unions. Maybe the days of the $250,000 welder are over.

 

Woodside can now take its time to negotiate the floating LNG option for Browse that will develop that field far more profitably than the on-shore option.

 

Pluto LNG was a revelation in the result. The company lifted pricing of its LNG product by 49% with most of the impact in the second half of 2014. The lift contributed US$958 million to group revenue while the increasing volume from Pluto added US$248 million revenue, and condensate adding a further US$113 million.

 

Pluto is now Woodside’s biggest earner in terms of EBIT at US$2.3 billion compared to the North West Shelf contribution of US$1.9 billion.

 

The company maintained its production guidance of 84-91mboe with the Wheatstone stake adding around 3-4mboe assuming the completion in March.

 

The combination of all these good things was that the Board once again bumped up the final dividend to US144cps bringing the full year total to US255cps. That compared to 2013’s full year ordinary dividend of US186cps without considering the US63cps special dividend that was also paid that year.

 

The Board maintained its intention of paying 80% of earnings as dividends unless something really bad happens (like Egypt invading Libya, or Russia annexing Ukraine or…) and this means shareholders are enjoying a 6.5% net yield (9.5% gross) on a non-bank stock.

 

Santos is fending off repeated calls to raise new equity while Oil Search looks like a good alternative oil and gas stock albeit with a higher risk profile. Woodside is clearly the bottom drawer option amongst its Australian peers.

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