Woodside Petroleum Limited (ASX: WPL) has steadily evolved into an 'apex predator' of the oil and gas industry. Having a dominant market position is great for investors, so with the knowledge that Woodside will almost double its dividend pay-out rate to 80% of free cash flow going forward, is it a 'must-buy' for dividend investors?
Dividend Policy and Performance
Woodside has an admirable dividend policy with the aim to "deliver superior shareholder value" by way of a reasonable dividend, something the company certainly delivered in 2014. Based on the exchange rates for the two most recent dividends Woodside's yield was around 9%.
Both interim and final dividends came fully franked and declaring the dividend in U.S. dollars adds a nice sweetener when converted to AUD.
So last year was good, but what about going forward?
Show us the cash flows!
Woodside paid out 43% of its free cash flows in 2014. According to a recent company presentation that puts Woodside among the top of the class when it comes to its dividend paying oil and gas peers.
Above: Woodside Petroleum is one of the best performing companies in its peer group. Source: Company presentation.
Going forward Woodside will bump that ratio up to 80% which feels positive for investors. The increase makes sense given the company paid down all its net debt during 2014 and has few significant capital investments coming up in the short term.
However the increased pay-out ratio will not necessarily result in higher dividends, especially if free cash flow drops. Free cash flow is derived from the company's operating cash flow and Woodside expects this operating cash flow to fall going forward.
Despite having strong contracted pricing for its LNG production, at a Brent oil price of US$65 per barrel Woodside forecasts operating cash flows to average around US$2.7 billion between 2015 and 2018.
This is depicted below and will be down significantly from the record US$4.785 billion in operating cash flow declared for the full year 2014.
Above: Woodside's forecast operating cash flow over the next three years based on US$65 per barrel. Source: Company presentation.
Exactly how much 'free cash' is left to distribute to investors will fluctuate depending on investing requirements and these requirements could rise over time. After all, to remain alive at the top of the food chain Woodside needs to invest in new projects.
Summary
I would rate Woodside's dividend report card a solid 'B'. It is one of the best positioned energy companies around with low debt and strong production. However operating cash flows are set to fall and before long Woodside will need to start reinvesting back into the company.
