Woodside Petroleum Limited (ASX: WPL) is very much top of the food chain in Australia's oil and gas industry.
With multiple, large scale, long-life projects piping cash to the company I thought it would be worth looking at Woodside from a dividend perspective. A review, if you like.
Dividend Policy and Performance
Woodside's stated dividend policy aims to payout a minimum of 50% of net profit, excluding non-recurring items. However the company says it hopes to maintain the current payout ratio of 80% in the coming years.
The dividend is set in U.S. dollars which is Woodside's reporting currency and, based on the exchange rates for the two most recent dividends, shares currently yield around 4.4%.
Declaring the dividend in U.S. dollars adds a nice sweetener when converted to AUD and historically the dividends come fully franked.
So the last 12 months have been good, but can it hold up going forward?
Sustainability: the capex conundrum
It's easy to be lulled into a false sense of security with energy producers like Woodside and Santos Ltd (ASX: STO). Strong cash flows today inevitably need to be offset with periods of significant capital expenditure to find and develop new reserves down the road.
Because capital expenditure can impact net profit (through depreciation and interest expense) we need to understand where Woodside is in this cycle and when this may change.
Woodside actually has few major projects coming up in the short term so the current phase of earnings is likely to last through to around 2021 with production expected to rise over this time, says CEO Peter Coleman:
"In the near term we expect to generate increasing cash flow and returns from our existing business and committed projects, and we see further upside potential from lower capital intensity and quicker to-market opportunities."
Between 2022 and 2026 Woodside will increase spending on new projects to develop existing assets to meet forecast LNG supply shortfalls, but will still have a strong base of production to bring in cash.
Beyond this Woodside plans to 'rinse and repeat', leveraging its competitive advantage as a deep-water operator to produce returns for investors as opportunities arise.
Summary
I would rate Woodside's current dividend an average 2.5-out-of-5 today.
It is one of the best positioned energy companies around with low debt and strong production which should translate into continued dividends in the next few years.
Longer term estimates are always more challenging, especially with commodities. My view is that Woodside's plan beyond 2021 is well reasoned and well timed relative to expected supply shortfalls from around 2022, but how this translates to dividends is hard to know.
