Fresh from its best annual report ever, Woodside Petroleum Limited (ASX: WPL) announced this morning that it was issuing US$1 billion of bonds to institutional investors in the United States.
The bonds will run for a period of ten years and pay a coupon of 3.65%.
Woodside stated that the funds will be used for 'general corporate purposes including funding our capital and expenditure program.'
Coming off a cash balance of US$682 million as at December 31, a billion dollars is real money even for Woodside and will allow plenty of the expenditure that is so key to improving future earnings.
A coupon of 3.65% also equates to a bargain for the company, as this is substantially below the cost of taking on debts in Australia and well below the company's return on equity.
With an average Return On Equity (ROE) of 13.42% over the last five years according to the annual report, Woodside is getting a great deal with its bonds issue.
Pay bond-holders 3.65% per annum for their funds, then employ that money to achieve returns of ~13% per annum for shareholders.
Talk about a sound business strategy!
Woodside also has a comparatively low debt position with US$1.541 billion in net debt as at the end of 2014.
With free cash flow (cash that can be used to pay debts or dividends, for instance) of over $4 billion in 2014 alone, debt or bond repayments don't pose much of a threat to the company's financials, even with falling oil prices.
I and many other contributors have questioned if this report was the last of the good times for Woodside shareholders after the fall in oil prices and anti-competitive tactics from oil cartel OPEC.
However the company continues to look like a sound long-term investment with impressive returns even if earnings and dividends appear likely to suffer in the near term.
