The Motley Fool

Why Woodside Petroleum Limited is too expensive

Visiting Vladivostok a few months ago it was easy to see this is a city on a roll – and one cause is the construction of a large LNG facility which is currently scheduled to commence exports in 2019. Likely customers include Japan, Korea and India.

By comparison the Vladivostok project is relatively small beer if compared to the recently signed long-term gas deal between Russia’s Gazprom and northern China. In a nutshell, 25% of China’s present gas demand will be piped directly from Russia; with deliveries to start in 2018.

Naturally these and other impending deals place considerable pressure on existing higher cost producers such as Woodside Petroleum Limited (ASX: WPL). Some points to consider:

1. Industry sources believe contract prices for the Gazprom China deal are at least 40% below current price levels.

2. Meanwhile development costs for relevant Russian projects are some 45% below large-scale offshore Australian projects.

3. West and East Siberia are believed to have vast untapped reserves of energy and other resources. A new major pipeline (Altai) is presently at the planning stage while the Power of Siberia pipeline will have excess capacity.

4. China’s own gas production is expected to increase steadily. In reaction to high levels of pollution, the Chinese government is likely to support further production – even if not economically justified.

5. Contracts due to be renegotiated from 2018 will be dealing with a confident buyers’ market.

Commendably Woodside’s management has withdrawn from participation in the giant Leviathan field (Israel) and is deferring other developments. In the meantime potential projects in Canada, Ireland and New Zealand are being looked at – however all of these have lengthy lead times and quite probably poor economics.

With North West Shelf production set to decline from 2020, Woodside is finding itself in a bind with rapidly diminishing new prospects for profitable growth. So far shareholders have been kept happy with a high proportion of earnings paid out in dividends. In my view the current price ($42.41) isn’t justified and the risk of medium term capital loss is high.

Every oil investor must read this!

Limited oil supply and growing demand mean oil prices are likely to rise over time. Position yourself to profit from this trend now, with The Motley Fool's brand-new FREE research report, "3 Oil Stocks to Send Your Portfolio Gushing Higher".

Motley Fool contributor Peter Andersen does not own shares in Woodside Petroleum

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.