Oil and gas giant Woodside Petroleum Limited (ASX: WPL) released its half year results to the market this morning. Despite an ugly fall in sales and profits, Woodside shares were up 3% to $29.34 at the time of writing.

Here’s what you need to know:

  • Sales revenues fell 22% to $2,305 million
  • Net Profit After Tax fell 50% to $340 million
  • Earnings per share fell 50% to 41 cents per share
  • Dividends fell 48% to 34 cents per share
  • Production rose 9% to 45.9 million barrels of oil equivalent (“mmboe”)
  • Production costs fell 38% to $5.2/barrel of oil equivalent (“boe”)
  • Gearing* rose from 19.9% to 22.5% as a result of higher total debt
  • Full year production outlook rose from 86-93mmboe to 90-95mmboe

Gearing = net debt divided by (net debt + equity)

So What?

Like fellow producer Santos Ltd (ASX: STO), Woodside’s profits were impacted by falls in the prices of its key commodities – falls which took a while to work their way through to the bottom line because of time lags in the delivery contracts. Although it’s common to refer to Woodside as an oil/gas company, it’s mostly a gas business and LNG prices at the company’s two biggest projects fell 27% and 37% respectively.

source: Company presentation

source: Company presentation

The aligned chart demonstrates where Woodside sits in realised price and unit cost terms compared to its peers – quite a favourable position. Although debt increased due to recent acquisitions, Woodside’s gearing of 22% remains well within the 30% limit defined by management, and allows plenty of funding for acquisitions.

Now What?

In the near term Woodside has a number of fields commencing production out to 2020, while the company also appears to have an eye for earnings accretive acquisitions. Most acquisitions are likely to be under $1 billion, with management believing these offer better value than big buys like the failed Oil Search Limited (ASX: OSH) bid a while back.

I noted a little while ago that oil/gas producers were starting to talk about a potential global gas shortage from 2020 due to the amount of projects that have been deferred in the current low price environment. Woodside has a pretty chart showing forecast supply and demand over the next two decades.

source: Company presentation

source: Company presentation

Whether you buy into the picture painted by that chart or not, if there is a shortage Woodside is in a better position to benefit than most as the company is cashed up and can make acquisitions. This is a stark contrast to more debt-laden competitors. 85%-90% of Woodside’s 2017-2018 production is already committed under contracts, which provides a degree of certainty to earnings (likely to be similar to this year).

The company retains some flexibility due to keeping some volumes available for spot-trading but as it was with the downturn, I expect Woodside will be slower than some other businesses to benefit from an upturn in prices (should one occur). I was also interested to note that Woodside is looking at stimulating demand by using LNG as a transport fuel – an interesting opportunity given the proximity of its LNG plants to two of the world’s largest ports by tonnage. I don’t expect much to come of it in the near term, but it could be a nice little side-earner, with eventual tailwinds to demand if more transporters adopt LNG.

As a result of its strong balance sheet and sterling assets, it’s hard to go past Woodside Petroleum if you’re chasing exposure to the gas industry.

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Motley Fool contributor Sean O'Neill 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.