Is the Woodside Petroleum Limited share price a buy?

The Woodside Petroleum Limited (ASX: WPL) share price has fallen heavily since the start of January when it was $34.65. Now it has fallen to today’s $28.70, representing a drop of 17%.

The market didn’t respond too favourably to the company’s report last month.

In the report, the production volume decreased by 11%, operating revenue decreased by 4%, earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 4.3%, earnings before interest and taxes (EBIT) increased by 18.9% and net profit after tax (NPAT) increased by 18%.

Obviously, the market was expecting more. Indeed, the company said the EBITDA was impacted by a lower exploration expense. However, Woodside has done a good job decreasing production costs over the past few years, which helps.

Woodside is as dependent on realised prices as all other resource companies are. The oil price and LNG price have both recovered since the 2016 low, but have dropped since the start of 2018.

It’s anyone’s guess what resource prices will do next, which is why it’s hard to time buying cyclical stocks. One of the best reasons to buy Woodside is its large fully franked dividend. The trailing grossed-up dividend yield currently sits at 6.2%.

The dividend follows the profit, which is of course heavily influenced by the resource price. If the resource price goes higher then that’s mostly just extra profit for the business. The dividend can’t be accurately predicted for upwards growth.

Global demand for oil and LNG is expected to rise, mainly from Asia. However, the western world is looking to reduce fuel consumption. I’m not sure we will ever see the oil price rise above US$100 again.

Foolish takeaway

Woodside is currently trading at 16x FY18’s estimated earnings. I don’t think this is a standout price at the moment, investors wishing to buy Woodside shares may be better suited waiting for the share price to fall to around $26.50 or lower before pushing the buy button.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Scott Phillips.

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