The Woodside Petroleum Limited (ASX: WPL) share price fell slightly after the company released its annual results this morning, despite record low production costs. Here's what you need to know (all figures are in USD):
- Revenue fell 19% to $4,075 million
- Net profit after tax rose 3,200% to $868 million
- Earnings per share of 104 cents up from 3.2 cents previously
- Dividends of 83 cents, down from 109 cents previously
- Production of 94.9 million barrels of oil equivalent (mmboe)
- Unit costs reduced 28% to $5 per barrel of oil equivalent
- Forecasting free cash flow breakeven at $35/barrel in 2017, including $1.6 billion of investment expenditure
- Forecast production growth to grow 15% between 2017 and 2020 via existing operations and planned projects
So What?
Looking past the ridiculous profit growth in percentage terms (due to write-downs in the previous year), Woodside actually delivered a weaker 2016 result amidst an environment of lower oil prices. Net profit after tax this year was some $250 million below 2015's result, primarily due to lower prices:
Woodside managed to make significant progress on the business front however, generating free cash flow of $114 million despite two significant acquisitions and a dividend. The company also cranked its production costs right down, with unit costs of $5/barrel among the best in the industry.
In 2017, Woodside expects to be free cash flow breakeven at $35/barrel, which means that as long as oil prices stay above that level, the company will make enough money to fund its investments and dividend payments without having to tap cash at bank or debt for more funding.
Low oil prices don't appear to pose much of an existential threat to Woodside, as the company has modest gearing levels of 24% and generates a respectable amount of cash. However, the potential for a further hit to profitability and dividends should not be discounted:
While many companies including Senex Energy Ltd (ASX: SXY) and Santos Ltd (ASX: STO) are rightfully positioning themselves to benefit from higher oil prices at present, this little chart from Woodside shows why investors might not want to get too excited. The data above suggests there could be a price correction on the horizon as oil producers lift production to take advantage of today's prices.
Woodside noted that the (oil) 'Price recovery will stimulate North American production…' and indeed this is likely already underway. As we can see from the chart, supply shortfalls in the past have resulted in higher prices and higher production to compensate.
Now What?
Investors looking to own Woodside should consider taking a through-the-cycle view, much as the company does. With a good set of assets, low production costs, and strong cash flows, Woodside can invest in buying or developing attractive new assets that will generate respectable returns regardless of whether sale prices are high or low. There's also potential upside if a suggested gas shortage comes to fruition over the next 5 to 10 years:
At today's prices, Woodside appears to have much of the short-term impact of higher oil prices factored in. However, the company has a solid plan in place for both improving production and maintaining high returns on investment over the medium term, and I wouldn't like to bet against it.
