I wrote earlier this week that shareholders in Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) should be wary of buying into both companies because of the potential for weaker oil prices to hit dividends and revenues from this quarter onwards.
That pain became apparent yesterday when Woodside posted its most recent quarterly report. Here are the highlights:
- Production volume down 7.8%* on planned turnaround at Pluto and unplanned outage at North West Shelf, partly offset by increased oil volume from newly acquired Balnaves
- Sales volume down 18.4%* on lower production and the timing of shipments
- Sales revenue down 36.2%* on lower production and prices
- Browse Basin project entered design and engineering phase, in anticipation of a Final Investment Decision in the second half of 2016
- Acquisitions of Wheatstone LNG, Kitimat LNG and Balnaves oil projects successfully completed
- Establishment of a $1bn loan denominated in USD split into two equal tranches, due in 3 and 5 years and at interest rates of ~1% and ~2% per annum respectively
The biggest takeaway from this report is the massive hit to sales revenue Woodside has suffered. The figures marked with an asterisk * above actually compare to the first quarter of 2015. Compared to the second quarter of 2014 – prior corresponding period or 'PCP' – production, sales, and revenue are down 14.5%, 9.3%, and 46.5% respectively.
To put that another way, the value of Woodside's sales were down 46.5% on the previous year, despite only a 9.3% reduction in sales volumes over the same period. This reflects the impact of vastly lower oil prices which took some time to come through to the bottom line.
Other news from the quarterly basically reflects confirmation of developments previously announced by Woodside, such as earlier oil/LNG acquisitions and the Browse FLNG design process.
Woodside Petroleum has told investors that it will maintain its dividend payout ratio at 80% of free cash flow, which means that investors should expect a decrease in yields this year. Rising oil and LNG prices may reverse some of the impacts but due to the nature of Woodside's pricing contracts, higher prices – like lower ones – take time to filter through to the bottom line.
Despite the implications for full-year profits and dividends, shares in Woodside fell only 1% yesterday, making it look pretty expensive. Woodside is a high-quality company with a great future and I would love to have it in my portfolio, but I can't recommend investors buy into a business whose share price remains static while profits fall drastically as a result of factors outside its control.
Shareholders in Oil Search likely have a similar quarterly report coming, while other companies such as Santos Ltd (ASX: STO) have already been hit with weaker prices and look to be better value at today's prices.
