Why Woodside Petroleum Limited is launching a $2.5 billion growth spree

This morning Australia’s largest oil and gas producer Woodside Petroleum Limited (ASX: WPL) posted a net profit of US$1.024 billion on sales revenue of US$3.062 billion for the six-month period ending December 31 2017.

The net profit was 18% above the prior year and the WA-based company will pay a final dividend of US49 cents per share dividend all funded from free cash flow of of US$832 million (up 630%) to reward shareholders who’ve been on a bumpy ride recently.

Total dividends for the year were up 18% to US98 cents per share which is around A$1.24 on an FX-adjusted basis. That’s a yield of 4% plus the tax effective benefits of full franking credits which is attractive if it’s sustainable.

At the same time the oil and LNG explorer met its requirement to invest for growth as it lapped up the benefits of a stronger oil price over the period with an average selling price of US$44 a barrel of oil equivalent (boe).

Production costs came in at US$5.20 per boe with a total “cashflow breakeven” cost of US$36 per boe.

The company expects to produce between 85 million to 90 million boe in 2018 compared to 84 million in 2017.

Gearing stood at 24% with its cost of debt a reasonable 3.7%, as Woodside remains a beneficiary of low bond yields for now. Net debt stood at US$4.75 billion with liquidity of US$2.94 billion in cash and undrawn debt facilities.


The other big announcement is that the group will seek to raise A$2.5 billion from investors to fund the acquisition of an up to 50% additional interest in the Scarborough gas field.

“The acquisition of the additional interest in Scarborough provides greater alignment, control and certainty over a low-cost, high value opportunity ahead of a global LNG supply gap,” according to Woodside’s CEO Peter Coleman.

Retail investors can apply for 1 new share for every 9 shares held at a price of $27 each.

The trend towards consolidation in the LNG sector across Australia is accelerating with Woodside previously attempting to buy PNG-based LNG producer Oil Search Limited (ASX: OSH), while 2016 saw the US$98 billion mega merger of Royal Dutch Shell and BG Group, both of which have extensive LNG operations in Australia.

As always the future of Woodside’s market valuation is tied closely to global energy prices with the company likely to produce a strong first half to 2018 as benchmark oil futures hover around US$65 a barrel.

If you believe oil prices have room to run higher in the 12 to 36 months ahead then Woodside is likely a good buy. However, I remain of the view that oil prices are in a long-term bear market and as such would be a seller of Woodside shares today.

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

You can find Tom on Twitter @tommyr345

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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