What: While some energy producers are preparing for skyrocketing production from upcoming LNG projects, industry major Woodside Petroleum Limited (ASX: WPL) seems to be at a crossroads. The market doesn't know which direction the company will take and either way may not satisfy it anyway. The market's interest can wane and then the bears start sniffing around.
So What: It's in these "quiet" times between major moves and business developments that investors need to focus on the business behind the stock. We can't predict what the company will do in the future, so we have to understand what the company says it will do and see how well it executes that.
Now What: Here are some things that investors need to keep in mind to better understand management's methods and reasons for acting.
– Financial position: In FY2013, the company had $2.9 billion in long-term debt, but underlying net profit was $1.9 billion, so first of all it's financially strong. It has ample space to grow organically or acquire companies without being forced to do something quickly.
– Turning down Leviathan project: The market thought the company was taking too long to accept or reject investing in the Leviathan LNG project based offshore near Israel. When it finally turned down the project, it freed up US$2.5 billion in funds for other investments.
That was after 18 months of negotiations, but management maintained its policy of disciplined investment. This followed its decision to stop its planned onshore development of an LNG plant in WA because of incredibly high projected costs. Sometimes the best business decisions are to say "No".
– Talking with Oil Search: The company had informal talks with energy producer Oil Search Limited (ASX: OSH) in May, though the exact details were not publicised. Some suggested it may be the start of a takeover, but it could also be about investing in Oil Search or a joint venture proposal.
Whichever it is, Woodside is planning the next step or two under the radar. With multi-billions in potential acquisition funds, it can act decisively in its own time. Long-term investors may need to be just as patient.
