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Why stronger profits and dividend failed to lift shares in Woodside Petroleum Limited (ASX:WPL)

The share price of Woodside Petroleum Limited (ASX: WPL) is taking a beating today even after management delivered an increase in profit and dividends while upgrading its production guidance.

But investors aren’t in a buying sort of mood, particularly not for oil and gas stocks after crude prices lost ground in overnight trade. The sector is the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index and Woodside is leading its peers lower with a 2.6% plunge to $35.35 in early trade.

This looks like a buying opportunity to me as I think the next 6 to 12 months is looking pretty good for our largest energy stock.

The sell-off is due to profit taking rather than anything fundamental after Woodside’s share price jumped 15% over the last six months when the market is up by less than half that.

Here are some of the key points from the results:

  • Underlying net profit jumped 11% to $566 million as revenue surged 27% to $2.3 billion for the six months ended June 30, 2018.
  • Woodside will increase its interim dividend by 20% to US53 cents per share (or around 72.6 cents). This should put the stock on a respectable net yield of 4%-5%.
  • Stronger oil prices and rising production volume contributed to a 25% increase in operating cash flow to $1.5 billion.
  • Higher production was due to better reliability from its Pluto project and the start up of Wheatstone LNG Train 1, which is producing above nameplate capacity.
  • Management is targeting to produce 100 million barrels of oil equivalent (MMboe) a year by 2020 and has given 2018 production guidance of around 87-91 MMboe.
  • The growth levers for Woodside are the development of its Scarborough, Browse and SNE-Phase 1 fields.

The problem with outperforming stocks is that they are prone to a sell-off if they miss expectations by a little or if they only just meet expectations.

This could be the source for contention with consensus forecast tipping an 18% increase in underlying earnings per share (EPS) for 2019. This means growth will need to accelerate further from 1H18.

The oil price will need to stay firm over the next 18 months or the company could struggle to meet expectations.

But given my take on the US dollar exchange rate and its rising production profile, I think it may not be that much of a stretch.

Woodside also has a cashed-up balance sheet and management could make an acquisition or two to bolster its growth if the opportunity arose.

It is also worth noting that while shares in Woodside have outperformed the market, it hasn’t done quite as well as most of its peers. Shares in Santos Ltd (ASX: STO) are up 26%, and Oil Search Limited (ASX: OSH) is not far behind with a 20% gain over the last six months.

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Motley Fool contributor Brendon Lau 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.