Is it time to buy Woodside?

Reduced capital expenditure should result in big dividends in 2014.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published December 10, 2013 4:29 pm AEDT

Woodside Petroleum (ASX: WPL) shares were up 1.5% during the day on Tuesday after the company announced a reduction in 2014 capital expenditure and narrowed the expected production range.

The giant oil and gas producer now estimates that 2014 production will be between 86 million and 93 million barrels, narrowed down from between 85 and 94 million. This is below the median estimate of 93.3 from five analysts surveyed by Bloomberg earlier this month. 2013 production is estimated to be between 86 million and 88 million barrels. Regardless, the share price rose as the company announced a reduction in 2014 capital expenditure (CAPEX) from $2.3 billion to $1.1 billion.

The reduction in CAPEX is due to a delay in the formal agreement to progress the Leviathan project in Israel. Woodside and its joint venture partners have an in-principal agreement for Woodside to take a 30% stake in the project but are yet to complete the deal. The 19 trillion cubic feet of gas contained in the resource is key to the company's growth plans. Woodside now expects the agreement to be formalised in the first half of 2014 and 2015 CAPEX expenditure would likely be between $2 billion and $2.4 billion.

Woodside's remaining 2014 CAPEX budget will be spent on design work for the Browse LNG project off Western Australia's northwestern coast and exploration. The company plans to spend around $500 million exploration, including $250 million on seven new wells off the WA coast and the Exmouth basin. It will also start work drilling in a controversial project off the Canary Islands and initiate seismic work off the coasts of Burma, South Korea, New Zealand and Peru.

So is Woodside a buy?

Leviathan is looking more and more like it will happen. The press release was positive about progress in discussions and the Israeli Supreme Court recently dismissed a challenge to the legality of the Israeli government's natural gas export policy. This should allow the company to export gas from the Leviathan project and realise greater profits. The reduction in CAPEX could also result in greater dividend payouts, supporting the share price in the medium term.

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