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Woodside Petroleum Limited near 52-week lows: Is this the bottom?

Bottom fishing with resources stocks can be done if you know the industry intimately and are up-to-date with news.

At some point, an industry gets to a cyclical low, potentially creating long-term value plays- like buying distressed houses in a depressed housing market. Still, just as you would avoid old shacks on the edge of town, investors should mostly stick to the market leaders.

They have the best chances to survive and potentially even pick up struggling junior rivals along the way. Having lots of cash, a strong balance sheet and low cost production is the company’s buffer against financial hardship.

One big name in energy, Woodside Petroleum Limited (ASX: WPL), is near new 52-week lows. Could this be the time to start picking it up, while the market avoids anything oil related?

Woodside Petroleum was trailing down from August highs, but a sudden drop in world oil prices sank the energy stock quickly. For the past year, it is down around 5.5%. Not fantastic, but income investors would be loving the enormous 6.6% fully franked yield, higher than all the big four banks currently.

For several months the company has announced investments in new greenfield projects. Also, at the end of November the North West Shelf LNG project participants approved the Persephone LNG project expansion- the third major gas development in the past six years. The North West Shelf project is producing at low cost, so even with Brent crude oil prices down as much as 40%, Woodside still has a comfortable buffer.

Nonetheless, falling oil prices may continue, thanks to the expansion of the US shale oil market and the Saudi decision not to boost prices by cutting production. This will affect Woodside’s share price if investors sell off oil companies as a group.

One way to possibly spot a bottom is when a new round of terrible news fails to sink share prices further and perhaps they even rally some. That’s when the bad news has been “baked into” the stocks and they could be fully discounted and ready to buy.

For Woodside and the general industry, I don’t think that time has come yet. Perhaps over the next 6 – 12 months we can see where oil prices go and how Woodside Petroleum reacts to them. I would watch the stock closely so that when the time comes you can recognise the buying opportunity. For now, I think it is better to sit back and wait.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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