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Is Woodside Petroleum still a buy?

It has been a good year for Woodside Petroleum (ASX: WPL) investors. Shares in the oil and gas producer have risen 14% since the start of the year and the company’s flagship Pluto LNG plant celebrated its first birthday since starting up in 2012, achieving a full year of production.

Woodside’s strong cash flows from all of its operations led to a 54% reduction in net debt and 28% increase in interim dividend, as well as an additional special dividend of US$0.63 cents per share. This was a welcome reward for investors who stuck by the company through the uncertainty and capital expenditure intensive phase of the Pluto project.

The year’s success extended into developing new growth opportunities going forward including the signing of an agreement to conduct exploration in the prospective Porcupine Basin off Ireland.

However the recent slump in oil prices and rumours of losing the key Israeli gas field project raise questions over Woodside’s ability to maintain the momentum going into next year.

The price of crude oil has been on a downward slide since the start of September, falling 15% from US$110 per barrel to US$93. This could impact not only Woodside’s oil production revenue, but also the spot price for LNG which is tied to the price of oil.

LNG made up around 70% of Woodside’s total production in 2012, but big producers like Woodside and Santos (ASX: STO) often have contracted prices with buyers for their long-term production which balances price fluctuations and lessons the impact. In addition the price of oil is still up from US$87 per barrel the same time last year.

Then there is the renewed speculation that Woodside’s involvement with the giant Leviathan gas field in Israel could become redundant if the gas is piped directly onshore rather than being processed offshore. Woodside hasn’t released any material news on the deal recently, which is coming up to 12 months since it was first announced, but was due to meet with Leviathan joint venture partners last week according to Business Spectator.

Foolish takeaway

Despite the uncertainty of oil prices and the Israel gas deal, Woodside has enviable assets and strong cash flows, which translate into steady dividends for investors. The company’s long-term prospects remain solid with opportunities to capitalise on its expertise in deep-water exploration in both the Porcupine Basin and the Browse Basin, and the strong cash flows from existing assets mean the company would still make a positive addition to your long-term portfolio.

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

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