Oil and gas giant Woodside Petroleum Limited (ASX: WPL) released its half year results to the market this morning. Despite an ugly fall in sales and profits, Woodside shares were up 3% to $29.34 at the time of writing.
Here's what you need to know:
- Sales revenues fell 22% to $2,305 million
- Net Profit After Tax fell 50% to $340 million
- Earnings per share fell 50% to 41 cents per share
- Dividends fell 48% to 34 cents per share
- Production rose 9% to 45.9 million barrels of oil equivalent ("mmboe")
- Production costs fell 38% to $5.2/barrel of oil equivalent ("boe")
- Gearing* rose from 19.9% to 22.5% as a result of higher total debt
- Full year production outlook rose from 86-93mmboe to 90-95mmboe
Gearing = net debt divided by (net debt + equity)
So What?
Like fellow producer Santos Ltd (ASX: STO), Woodside's profits were impacted by falls in the prices of its key commodities – falls which took a while to work their way through to the bottom line because of time lags in the delivery contracts. Although it's common to refer to Woodside as an oil/gas company, it's mostly a gas business and LNG prices at the company's two biggest projects fell 27% and 37% respectively.
The aligned chart demonstrates where Woodside sits in realised price and unit cost terms compared to its peers – quite a favourable position. Although debt increased due to recent acquisitions, Woodside's gearing of 22% remains well within the 30% limit defined by management, and allows plenty of funding for acquisitions.
Now What?
In the near term Woodside has a number of fields commencing production out to 2020, while the company also appears to have an eye for earnings accretive acquisitions. Most acquisitions are likely to be under $1 billion, with management believing these offer better value than big buys like the failed Oil Search Limited (ASX: OSH) bid a while back.
I noted a little while ago that oil/gas producers were starting to talk about a potential global gas shortage from 2020 due to the amount of projects that have been deferred in the current low price environment. Woodside has a pretty chart showing forecast supply and demand over the next two decades.
Whether you buy into the picture painted by that chart or not, if there is a shortage Woodside is in a better position to benefit than most as the company is cashed up and can make acquisitions. This is a stark contrast to more debt-laden competitors. 85%-90% of Woodside's 2017-2018 production is already committed under contracts, which provides a degree of certainty to earnings (likely to be similar to this year).
The company retains some flexibility due to keeping some volumes available for spot-trading but as it was with the downturn, I expect Woodside will be slower than some other businesses to benefit from an upturn in prices (should one occur). I was also interested to note that Woodside is looking at stimulating demand by using LNG as a transport fuel – an interesting opportunity given the proximity of its LNG plants to two of the world's largest ports by tonnage. I don't expect much to come of it in the near term, but it could be a nice little side-earner, with eventual tailwinds to demand if more transporters adopt LNG.
As a result of its strong balance sheet and sterling assets, it's hard to go past Woodside Petroleum if you're chasing exposure to the gas industry.
