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Will Woodside Petroleum Limited pay a huge dividend in 2018?

With multiple, large scale, long-life projects piping cash to the company oil and gas producer Woodside Petroleum Limited (ASX: WPL) has set an expectation as a big dividend payer.

Woodside currently pays out about $1.27 per share which at the current share price yields 4% and comes fully franked.

For investors looking for a cash return this certainly trumps fellow producers Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH).

Woodside’s stated dividend policy aims to payout a minimum of 50% of net profit, excluding non-recurring items. However the company says it hopes to maintain the current payout ratio of 80% in the coming years so a good financial result for Woodside should prop up the payment to investors.

Oil price expectations

This will depend in part on the price for oil. Although Woodside has explored the idea of fixed price LNG contracts, at the end of the day most supply contracts are still linked to the fortunes of oil.

For the first six months of 2017 Woodside was free cash flow positive at US$34 per barrel of Brent Crude. The company’s average realised price over that time was US$43 per barrel and the good news is that as we head towards 2018 the oil price sits well above that level.

Above: The trend of increasing oil price trends are good news for Woodside Source: Bloomberg

However, analysts are cautious on the price of oil heading into 2018 as the cost of extracting shale oil comes down and production increases.

BP Chief Financial Officer Brian Gilvary for example told Reuters that the company expects oil prices to sit between US$45-US$55 a barrel in 2018.

Cash generating mode

Still, from a dividend perspective Woodside is very much in cash generating mode.

Capital expenditure can impact net profit through depreciation and interest expense, but Woodside’s immediate capital expenditure plans are limited heading into 2018.

CEO Peter Coleman said earlier this year that the current phase of earnings is expected to last through to around 2021, with production expected to rise over this time.

I think Woodside is well positioned to deliver for dividend focused investors in 2018, however with the moody sentiment remaining around the price of oil going forward I would prefer to invest in a company without commodity price risk.

I have three companies in particular on my watch list as we head into 2018, which you can read about here.

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Motley Fool contributor Regan Pearson has no position in any of the stocks mentioned.

You can follow him on Twitter @Regan_Invests.

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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