Woodside Petroleum (ASX: WPL) is Australia's biggest independent oil and gas producer with operations primarily located off the coast of Western Australia and South East Asia. Like Santos (ASX: STO), Oil Search (ASX: OSH), Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP), Woodside is positioning itself to benefit from the huge demand for natural resources from Asia's rising middle class.
Driving value from the core
Woodside's North West Shelf ("NWS") project located off the coast Karratha is one of best LNG producing fields in the world and has provided an excellent stream of ongoing earnings to Woodside shareholders since 1984. With both NWS and Pluto LNG (also located off the coast of Karratha), Woodside's management have formed lucrative sales contracts with customers in Japan which create a foothold for further growth initiatives.
Growth prospects for Woodside in coming years include an expansion of the NWS project, Browse FLNG (with contingent resources of 14.9 trillion cubic feet of dry gas and 441.2 million barrels of condensate), Sunrise LNG and the recently discovered, giant Leviathan gas field off the coast of Israel. In my opinion, any valuation of Woodside which includes these projects should take into account the considerable amount of regulatory risk surrounding the progression of both Leviathan and Greater Sunrise fields.
Recent performance
2013 was a tough year for the oil and gas giant as its top line felt the pain of a higher proportion of gas production. In addition the production cost (per unit) of both oil and gas rose. However in the case of oil production, this could largely be attributed to the maintenance of the Vincent floating storage unit. Lower revenues and higher costs filtered down into lower earnings for the company but was somewhat offset by a lower-than-usual capex spend.
In the short-term, capex will rise as the company returns to more normal levels of exploration and focuses on getting the Leviathan project underway.
Valuation
Woodside shares change hands at around 18 times FY13 earnings per share, 13 times forecast FY14 earnings per share and a price/book ratio of 2. Although I expect revenue and profit growth in FY14, until more certainly can be given to investors over the Leviathan project, I think Woodside currently trades around fair value.
