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Is the Woodside Petroleum share price a bargain today?

Woodside Petroleum Limited (ASX: WPL) has seen its share price jump by 2.2% today to $30.28, well ahead of the market’s gains.

Australia’s largest independent oil and gas producer has had a much better time of it this year compared to heavily indebted peers Santos Limited (ASX: STO) and Origin Energy Ltd (ASX: ORG). Santos and Origin have seen their share prices halve so far this year, as both companies were forced to issue billions in new capital to shore up their balance sheets.

Woodside could call itself lucky that its $14.9 billion Pluto LNG plant has been in production since May 2012, resulting in soaring production and large cash flows.

For the 12 months to December 2014, Woodside posted production of 95.1 million barrels of oil equivalent (mmboe) – up from 64.6 mmboe in 2011. That saw operating revenues of US$7.4 billion and an underlying net profit of US$2.4 billion, a rise of 38% over the previous year. Free cash flow rose 84% to a whopping US$4.2 billion.

That has allowed Woodside to pay out significant amounts in dividends to shareholders, including US$2.55 (~A$2.77) in fully franked dividends last year – equivalent to a 9.1% dividend yield.

Cash levels rose significantly to US$3.3 billion while debt fell to US$2.6 billion. By comparison, Santos had around $9 billion of debt before its $3.5 billion capital raising, while Origin had $11.8 billion of debt on its books at the end of June 2015.

But the falling oil price will take a toll on Woodside’s earnings this year. For the first six months to June 2015, the company reported a net profit of US$679 million, down 39% on the previous year. That’s directly attributable to the falls in the oil price, but also 10% lower production.

Dividends also fell and are likely to be cut again when the company reports its full-year results in February 2016.

Oil Search offer

Woodside has made an $11.6 billion offer to buy Oil Search Limited (ASX: OSH) and reports suggest the company could raise up to $3 billion in debt to partly fund the deal. Woodside has offered 0.25 Woodside shares for every Oil Search share.

The key question though is how Woodside is going to fund a number of its large growth projects in the years ahead. A takeover of Oil Search appears to be a reasonable approach to buy growth, but the company could be forced to raise more capital to fund some of its other large projects such as the Browse LNG project.

Foolish takeaway

While the fully franked dividend yield might be enticing, shareholders could find themselves paying it back to Woodside to fund additional projects. Additionally, full-year earnings are expected to be down more than 50%, which doesn’t make Woodside shares cheap.

 

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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