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Woodside announces a $6.2 billion hit

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Woodside Petroleum Limited (ASX: WPL) has announced a multi-billion dollar hit to its asset base after trading on Tuesday. In summary, the company is expected to recognise non-cash, post-tax impairment losses of US$4.37 billion (~$6.2 billion AUD) across most of the company’s assets. Specifically, US$2.76 billion for oil and gas properties and an additional US$1.16 billion for exploration and evaluation assets. Lastly, it includes a post-tax onerous contract provision for the Corpus Christi LNG sale and purchase agreement of US$447 million.

This follows the A$570 million write down announced yesterday by Oil Search Limited (ASX: OSH). In addition, there have been revisions by numerous international oil and gas companies. BP in particular commented that it believed the coronavirus crisis would accelerate the shift away from fossil fuels. However, Woodside has stated that its balance sheet is “not materially impacted” by the impairment. 

Causes of the impairment

The company revealed low oil and natural gas prices caused 80% of the impairment losses. Oil prices have been conservatively assumed up to 2025. Additional contributors are long term demand uncertainty from Covid-19 and increased risk of higher carbon pricing.

Woodside insists that the fundamentals of its business remain strong. In particular, that LNG is part of a decarbonising world and a continuing strong outlook for its core product, natural gas to Asia. The company also spoke of its planned move into hydrogen and ammonia. 

Management commentary

Woodside CEO Peter Coleman said the company is in a strong position to take advantage of opportunities, which will inevitably arise.

“We’ve taken some tough decisions over recent months in response to the COVID-19 pandemic and oversupply in our key markets, but Woodside’s focus remains on cash preservation, capital discipline, and maintaining the strength of our balance sheet. This will ensure we can deliver appropriate returns to shareholders and maintain our investment grade credit rating over the long term.”

“…The unique confluence of events that has unfolded through 2020 will challenge all participants in the global energy sector and we expect to see adjustment of capital allocation priorities by other asset owners as the cycle plays out…”

The company’s forward oil price estimates are for US$44 in FY21 and US$55 in 2022. 

Woodside share price

The Woodside share price is currently trading at a price to earnings ratio of 40.69. This gives the company a valuation of $20.44 billion and a current trailing 12 month dividend yield of 6.37%.

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Motley Fool contributor Daryl Mather 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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