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Is it time to buy Woodside Petroleum?

Woodside Petroleum Limited (ASX: WPL), Australia’s second largest oil and gas producer after BHP Billiton (ASX: BHP), is undervalued according to significant shareholder Shell  (NYSE: RDS.A). In comments made to Bloomberg, Chief Financial Officer Simon Henry has said the company will not sell its holding in Woodside until the price improves.

While the admission should be taken with a grain of salt given Shell would benefit from bumping up the price, a look at the numbers suggest the claim may have merit. If that’s the case, Woodside could be a company to consider adding to your portfolio.

Shell holds 23% of Woodside and has confirmed it wants to sell the stake which Mr Henry has stated is “no longer strategic”, within Shell’s business. One reason thought to be behind the strategic shift, is Woodside’s venture into Israel, a move which has been said to clash with Shell’s exposure in the Middle East.

Woodside on the cheap

Woodside’s share price has fallen back in the last few weeks after advancing strongly in April, on the news that high cashflows would lead to a special dividend being paid. Today Woodside trades at a price/earnings ratio of 10 on 2012 earnings, compared to BHP’s ratio of 18, or Santos Limtied’s (ASX: STO) P/E of 22.

Strong cashflows

The strong cashfows which prompted the special dividend, and which will see a higher dividend pay-out ratio going forward, are set to continue now that Woodside’s Pluto LNG plant is fully up and running. Pluto contributed to a 31% increase in annual production in 2012 to a record 84.9 million barrels of oil equivalent (MMobe).

Growth potential

The low P/E ratio suggests the market is expecting only limited growth from Woodside going forward, but the company holds rights to some significant gas reserves in the Browse Basin, which combined are estimated to hold 15.9 trillion cubic feet of gas.

Woodside is currently considering the feasibility of a floating LNG facility to extract and produce the reserves and it is these reserves that Shell believes is being ignored by the market.

The market understandably until now has not really given value for Browse,” Simon Henry is quoted by Bloomberg as saying, continuing “if the market recognises the value of Browse, it would value the shares more fairly.”

Foolish Takeaway

Paying a gross dividend of 3.7% with reliable cashflows from Pluto LNG, as well as other existing operations, Woodside looks like an attractive option covering both yield and long term growth; a rare and potentially lucrative combination.

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More reading

Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article. 

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