Why Woodside Petroleum Limited shares could sink further

Shares in Woodside Petroleum Limited (ASX: WPL) dropped to $25.10 this morning at a 10-year low after the company updated the market with its production report for the quarter ending December 2015.

As a result of lower short and long-term oil and gas price assumptions the company announced impairment charges totaling US1 billion to US$1.2 billion on the cash-generating value of its oil and gas properties.

Worse news for investors in terms of the implications for the future direction of the share price is the company’s admission that “profit for the purpose of calculating the final dividend is expected to be adjusted for impairments and other one off material non-cash charges.”

The warning over the slashing of the prized final dividend is likely to send many investors scurrying for the exits between now and March 2016.

Any investors holding onto the stock as an income play will need to be prepared to take a long-term view as the stock is likely to remain under selling pressure until any news emerges that suggests a decisive reversal of the current oil bear market.

The company’s flagship LNG and oil producing assets are the Pluto and North West Shelf projects in Western Australia, with a total of 92.2 million barrels of oil equivalent produced over 2015.

Sales revenues slumped 37% compared to the prior corresponding quarter as oil and LNG prices continued to tumble. Overall production volumes lifted more than 6%, but this was insufficient to offset the global energy price falls.

The company is forecasting production in the range of 86 million to 93 million barrels of oil equivalent in 2016, with investment expenditure in the region of US$1.96 billion – an amount significantly down on 2015.

Woodside’s strong balance sheet mean it looks a far superior bet than heavily indebted rivals like Santos Ltd (ASX: STO) or Origin Energy Ltd (ASX: ORG), although it remains at the mercy of the future direction of the oil price.

Much like equity markets in general that remain gripped with fear over the implications of the tumbling oil price and its potential to act as a forewarning of coming global economic contraction.

What would YOU do if the market crashed tomorrow?

With the ASX flirting with 5,000, some experts are predicting a market crash. Discover our Foolish experts' advice on what YOU should do in the event of a crisis -- simply click here for your FREE copy of our newly updated report, "What to Do When the Sharemarket Crashes". Click here, it's FREE!.

Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.