2016 has been a difficult year for Woodside Petroleum Limited (ASX: WPL). Although the price of Brent has risen from US$27 per barrel in February to its current level of US$48 per barrel, the company's financial performance has been disappointing. Revenue and profitability have both fallen versus the prior year, sending Woodside's share price lower by 5%.
However, Woodside remains well funded and financially stable.
For example, it carries low balance sheet risk, with net debt standing at 29%. This means that Woodside's net operating cash flow of US$2.4 billion was sufficient to cover interest payments on its debt of US$119 million over 20 times in financial year 2015. And with capital expenditure and exploration expenditure totalling US$2.5 billion over the last two years, Woodside seems to be investing for future growth while maintaining a disciplined approach to its cash flow management.
This is good news for investors since it means that Woodside is among the most financially secure resources companies on the ASX. It is also in the midst of a major cost reduction programme which should make it more competitive versus sector peers. For example, in FY 2015, Woodside reduced its break-even cash cost of sales by 22% to US$11 per barrel of oil equivalent (boe). And with its proven plus probable (2P) annual total reserves ratio rising to 276% in FY 2015 (mainly through acquisitions), Woodside is readying itself for a continued upturn in the prospects for the oil price.
This focus on cost reduction and acquiring high-quality assets at low prices is a sensible strategy in my view. However, the fact remains that Woodside is focused on oil and gas, while other resources stocks such as BHP Billiton Limited (ASX: BHP) have greater diversity. As such, Woodside's financial performance has a high level of correlation with the oil price, meaning that it is arguably riskier than a number of other resources companies.
Of course, all resources stocks are price takers, but Woodside lacks operational diversity in my view. It may have exploration assets across the globe, but its production assets are still only found in Australia.
I also think that Woodside's reduced production could prove to be a problem in the long run. For example, in FY 2015 production fell by 3% and in Q1 of the current year it declined by a further 4.8% from the previous quarter. Sure, the oil price has fallen and so the average realised price will be lower, but in my view Woodside should be attempting to maintain or even increase market share during the current low ebb for the oil price in order to deliver improved profitability.
Although Woodside is financially sound and has been able to increase its 2P reserves through acquisitions, its lack of diversity and falling production mean that it is not the ultimate resources company in my view.
