Australia's largest oil and gas company, Woodside Petroleum Limited (ASX: WPL) has remained quite stoic in the face of crumbling oil and Liquefied Natural Gas (LNG) prices.
Whereas other stocks like Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY), and Beach Energy Ltd (ASX: BPT) have all fallen more than 40% in the past 12 months – roughly in line with oil prices – Woodside is down just 17%.
Part of this is thanks to Woodside's trailing 7.4% dividend yield, which is fully franked and denominated in US dollars as well for an additional boost.
However, an increasing number of market watchers have begun to speculate that Woodside's dividend, profits and share price are finally coming under threat.
Part of the reason for a consistently high share price is that Woodside's contract pricing schedules lag the market, meaning that for 6 months after prices fall, Woodside continues to make sales at the higher rate.
Oil Search Limited (ASX: OSH) also employs a similar method in its LNG contract pricing, and it's no coincidence that Oil Search shares are also only down 26%, below the sector average. Lagging price agreements are great while they last and during periods of market volatility, but they can't hide the impact that sustained low oil and LNG prices will have on revenue.
An article published in Fairfax media this morning quoted a UBS analyst who estimated that Woodside and Oil Search would finally experience the full force of weaker prices this quarter, in the form of a 36% and 35% decline in revenue respectively.
Woodside has already told investors that it intends to keep its payout ratio at 80% of earnings, and will not take on debt to maintain a high dividend. Based on this I'd say it's a given that dividends will fall and Oil Search investors should also brace themselves for further pain.
As I wrote a few weeks ago, Santos Ltd appears to be a better deal than Woodside given that the former already has lowered earnings and negative sentiment baked into its share price. Investors are still excited about Oil Search, but I feel that the company carries too much risk and not enough promise in its inflated share price – despite recent falls.
Just like a number of other commodity shares seemingly offering great dividend yields, punters buying into Woodside and Oil Search right now are likely to be rewarded with falling share prices and a declining dividend.
