Woodside Petroleum (WPL)

Fat Prophets

Thursday 26th June 2014

Woodside Petroleum (WPL)

What’s new?

Woodside Petroleum has orchestrated the partial exit of Royal Dutch Shell as a major shareholder. The transaction came as Shell globally has been consolidating its business operations into an upstream emphasis. While for Woodside Petroleum, part of a major market overhang of stock has now been removed.

In a move to reduce Shell’s shareholding from 23.1% to 4.5%, the Board of Woodside Petroleum initiated a two pronged transaction. The transaction optimises the company’s capital structure as it is accretive on a per share basis for earnings, cash flow, net tangible assets and dividends.

The transaction involved two prongs, being a selective buy-back, requiring shareholder approval, and an institutional sell-down. The institutional sell-down of 9.5% of the share capital at $41.35 has already been successfully completed.

Meanwhile, the buy-back by the company of another 78.3 million shares (9.5% of the issued capital) has been set at $36.49 per share and consists of a capital component of US$7.95 (circa $8.43) and the remainder as a fully franked dividend.

The selective buy-back is subject to shareholder approval, and will be voted on in August. We consider the selective buy-back transaction is fair as it is value accretive in the current pricing environment for Woodside shareholders.

Outlook

We believe the financial performance of the company in the post ‘Pluto’(one of Woodside biggest assets) production environment has been exemplary.

The company plans to maintain a strong balance sheet to sustain its current credit rating. Going forward however, the gearing is targeted at 25% with the company planning to maintain a through the cycle gearing range of 10% to 30%.

On the dividend front, the company’s policy is to maintain an 80% payout ratio, which should be sustainable for the foreseeable future.

Growth is an important aspect of the company’s future potential and to this end it is targeting to uplift volume from its existing assets in the range 3% to 5%. Production guidance for 2014 is in the range 86 million to 93 million barrels of oil equivalent.

Exploration wise, Woodside is focusing on emerging provinces of materiality and quality, including Ireland, New Zealand and Myanmar. Meanwhile, its own backyard in the Carnarvon Basin remains highly prospective with lower risk.

Price

Investor appetite has improved in recent months and continues a recovery that has been in place following the lows of 2012. The shares have now popped up over the key $40 barrier and higher levels look likely over the medium term.

Worth Buying?

We have a bullish long-term view on energy prices, with a recent spark given here by tensions in Iraq. Woodside provides leverage to this theme, and a robust near-term cash flow profile further support our optimistic outlook.

We therefore believe Woodside is worth buying for investors with a medium term investment horizon

Disclosure: The author, and interests associated with him, hold shares in Woodside.

Greg Smith is the Head of Research at Fat Prophets sharemarket research.

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