Woodside Petroleum Limited (ASX: WPL) yields 4.2%. This is 10 basis points higher than the ASX’s yield. Therefore, investors may see Woodside as a realistic income option at a time when interest rates have fallen. However, its risk profile means that this is not the case.

Finances

Woodside’s financial standing indicates that its dividends are affordable and sustainable. In the last five years it has reduced break-even cash costs of sales by 33% and increased production by 43%. This was aided by a productivity programme which delivered annual benefits of US$700 million in the 2015 financial year. Woodside’s break-even cash cost of sales is now US$11 per barrel of oil.

Woodside raised US$4.1 billion in new and refinanced debt facilities in the 2015 financial year. However, its net debt to equity ratio is modest at 29% and the refinancing reduced Woodside’s pre-tax portfolio cost of debt down to a more competitive 2.9%. This will aid profitability and dividend coverage for the 2017 financial year, where dividends are forecast to be covered 1.3 times by earnings.

Strategy

Woodside’s strategy aids its long term dividend prospects. That’s because it is investing for the long term through acquisitions which have the potential to boost profitability – particularly because they have been undertaken while valuations across the industry are low. For instance, Woodside acquired all of ConocoPhillips’ interest in Senegal for US$350 million in July. This provides Woodside with a significant position in an under explored emerging oil province.

Investment in Woodside’s asset base increased in the 2015 financial year. Capital and exploration expenditure was US$1.8 billion versus US$700 million in the previous year. This contributed to an increase in Woodside’s proven plus probable (2P) reserves of 13% in the 2015 financial year, which provides increased long term profit and dividend growth potential.

Risk profile

Although Woodside’s finances and strategy indicate that it is a sound income stock, its risk profile remains high. As with all resources companies, Woodside is a price taker. Its profitability and ability to pay dividends are highly dependent upon the price of oil.

However, Woodside has additional risk versus sector peers such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). BHP Billiton has a diverse asset base with exposure to commodities such as iron ore, copper and oil. Rio Tinto has a geographically diversified asset base which includes a range of producing assets across the globe. In contrast, Woodside is an oil & gas company which only has producing assets in Australia. Therefore, it lacks geographical diversity and production diversity.

Therefore, Woodside’s yield may beat that of the ASX. But income seekers should look elsewhere owing to its relatively high risk profile.

 

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.