Woodside Delivers for Shareholders

By David Dittman • April 25, 2013 • Pacific Digest

Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY), Australia’s second-biggest oil and gas producer, has significant cash on its balance sheet–AUD2.4 billion as of Dec. 31, 2012. Its focus of late has been on liquefied natural gas (LNG), with eyes also on expanding its business beyond Australia. Oil exploration is concentrated on offshore assets.

In mid-April the company announced that it would not go forward with the proposed onshore development of the 12 million metric tons per annum, USD46 billion Browse LNG project at James Price Point near Broome, Western Australia. Woodside, the operator of the East and West Browse joint ventures, has a 34 percent equity stake in East Browse and 17 percent in West Browse.

In a statement, Woodside said it will study alternatives, including a smaller plant at James Price Point, a floating LNG project and saving the gas to process at a later date through the North West Shelf plant at Karratha. One of its partners in the Browse venture, Royal Dutch Shell Plc (London: RDSA, NYSE: RDS/A), is a proponent of the floating-platform option. Shell, through Shell Development Australia, has a 27 percent stake in the project.

In an interview with www.CompanyInsight.net.au, CEO and Managing Director Peter Coleman described the decision to halt the Browse development as one of economics. Mr. Coleman noted, “The cost escalation on Browse has been consistent with other projects in Australia. Unfortunately, the cost escalation has been such that the total costs…have resulted in the current development concept not being commercial.”

Woodside hasn’t abandoned Browse, an asset that still holds significant value for the company.

The company also recently ended talks with other owners of gas resources to secure new supplies for an expansion of its Pluto LNG project, the first phase of which, after coming on line in April 2012, has led to significant increases in production and cash flow. In late 2012 Woodside delayed a proposed second phase after a drilling campaign failed to find enough gas to support it.

Woodside noted that it’s “continuing in the pursuit of expansion gas” and has further drilling planned in the region.

Rather than let its already ample cash pile continue to grow on a balance sheet simultaneously strengthened by recent debt reduction, Woodside this week announced a plan to share more of its largesse with shareholders.

Noting that the company “is in the fortunate position…of having a number of promising growth prospects ahead of it and also experiencing strong cash flows,” Chairman Michael Chaney announced that Woodside’s board “has concluded that it would be appropriate to pay a special dividend to shareholders now and increase the company’s dividend payout ratio.”

Management has significant time yet before future development projects will require capital investment, and debt continues to shrink. This combination, along with the ramp-up at Pluto, equals a significant free cash flow boost.

Woodside declared a special dividend of USD0.63 per share, which will be paid May 29, 2013, to shareholders of record as of May 6. Shares will trade ex-dividend as of April 30. The dividend will be fully franked for Australian taxation purposes. Note that Woodside’s dividends are determined and declared in US dollars.

Management has also adjusted regular dividend policy “given Woodside’s strong liquidity position.” Effective immediately the company will target a dividend payout ratio of 80 percent of underlying net profit after tax, up from approximately 50 percent. Based on current forecasts, this payout ratio is expected to be maintained for several years.

Management will review the new target if “significant” new investment opportunities arise or if business performance or external circumstances change materially.

Driven by an impressive start-up for its USD15.5 billion Pluto LNG project, Woodside reported 2012 underlying net profit surged by 25 percent to USD2.06 billion, while statutory net profit after tax (NPAT) was up 98 percent to USD2.98 billion. Operating cash flow was up 55 percent to USD3.5 billion.

Overall production for 2012 was up by 31 percent to 84.9 million barrels of oil equivalent, while annual sales climbed 31 percent and revenue ticked up by 30 percent to USD6.22 billion.

Management boosted the final dividend in respect of 2012 results by 18.2 percent.

Pluto continued to drive results during the first three months of 2013, as management reported a 21 percent increase in first-quarter sales increased by 21 percent to USD1.45 billion from USD1.2 billion a year ago. Production for the period ended March 31 was up 55 percent to 21.9 million barrels of oil equivalent from 14.1 million a year earlier.

Based on the new 80 percent payout ratio Woodside is on track to yield 6 percent to 7 percent based on the current market price. That makes it not just a high-yielding resource stock but a high-yielding stock, period.  There will be questions about its production growth profile going forward. But existing projects should produce impressive cash flow, and its output profile includes significant exposure to crude oil. A rebound for black gold as global growth gets back on track will certainly help Woodside.

Gearing–or net debt as a percentage of total capital–is on track to decline from 17 percent as of the end of 2012 to 11 percent by the end of 2015.

We recommended Woodside to Australian Edge readers in a March 2013 In Focus feature, wherein we discussed Linc Energy Ltd’s (ASX: LNC, OTC: LNCYF, ADR: LNCGY) potentially massive shale assets in the Arckaringa Basin and the companies that could line up as possible partners to fund development of a resource that could rank with Canada’s oil sands in terms of overall reserves.  

Based on management’s recent moves it’s fair to say Woodside–which we identified as a “remote possibility” for partnership with Linc but included in the discussion because of its ample cash position–is more focused on returning cash to shareholders, reducing debt and positioning for growth opportunities more than three years out on the horizon.

The stock drifted downward just after the March 2013 AE was published but bounced markedly following management’s announcement of the special dividend and the new payout ratio policy.

Woodside’s assets are world-class, more than capable of supporting its now-current dividend aspirations as well as longer-term growth. It’s also providing ample yield in a yield-starved world.

Woodside Petroleum is a buy under USD42 on the ASX using the symbol WPL and on the US over-the-counter (OTC) market using the symbol WOPEF.

Woodside also trades as an American Depositary Receipt (ADR) on the US OTC market under the symbol WOPEY. Woodside’s ADR is also a buy under USD42.

The Roundup

Here’s where to find discussion of earnings for AE Portfolio companies, most of which just reported fiscal 2013 first-half results. Some posted results for 2012, while others report on completely different schedules. We’ve included the next reporting dates for those companies. Please consult the Portfolio tables at www.AussieEdge.com for current advice.

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