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Stock: Woodside Petroleum Limited

Stock code: WPL

Share Price: $45.70 (as at close 03/06/11)

P/E Ratio: 23.9 (Sector P/E 21.76)

Market Cap: $36,251,000,000

Broker Buy Recommendations:

Intersuisse (23rd May 2011, share price was $45.23 that day)

Investorfirst Securities (23rd May 2011, share price was $45.23 that day)

Novus Capital (8th May 2011, share price was $45.31 that day)

Patersons Securities (27th March 2011, share price was $46.72 that day)

William Shaw Securities (20th March 2011, share price was $44.41 that day)

Broker Hold Recommendations:

Macquarie Private Wealth (23rd May 2011, share price was $45.23 that day)

Calibre Investments (27th March 2011, share price was $46.72 that day)

Investor Centre: Woodside Petroleum

Company news: Woodside Petroleum

Chart: Share price over the year to 05/06/2011

Demand for energy remains strong, and, according to Standard & Poor’s, the sector has also been rewarding. Origin Energy and ConocoPhillips recently signed a $90 billion deal to supply China’s Sinopec Corporation with up to 4.3 million tonnes of LNG a year for the next 20 years. Woodside Petroleum is also optimistic, forecasting a robust LNG market for the next 15 years.

Cleo Nanni, of Novus Capital, says Asia’s population growth, urbanisation and rising living standards will continue to lift demand for gas. And Nanni says Woodside Petroleum has a lot to offer, representing good buying at these levels.

The oil and gas category, part of the broader energy sector, consists of more than 60 companies for a market capitalisation of $125 billion. According to Standard & Poor’s, the S&P/ASX 200 Energy Index has rewarded investors with a 8.72 per cent annualised price return for the 12 months to June 3, 2011. Over five years, the annualised price return is 37.12 per cent. In contrast, the S&P/ASX 200 booked an annualised price return of 3.00 per cent for the year to June 3, 2011 and a negative 7.71 per cent over five years. Nanni sees the energy sector continuing to post positive returns. “In particular, gas is a solid investment and listed companies should be part of any long term portfolio,” he says.

Description

Woodside, formed in 1954 when it initially focussed on oil exploration off Australia’s south coast, is now Australia’s biggest listed oil and gas producer. It is one of the world’s leading producers of liquefied natural gas, supplying Japan, China, Korea and other countries in the Asia Pacific region.

According to the company’s website, ‘major natural gas discoveries off the Western Australian coast in the 1970s changed the company’s direction’ and the company is now one of the world’s preeminent producers of LNG.

WPL operates the A$27 billion North West Shelf Project, which has been producing natural gas for 27 years and LNG for the past 22 years. The company’s massive Pluto foundation project is on track for first LNG in 2011 and it is already planning for an expansion of the Pluto project, plus it is seeking to develop a further two LNG projects – Browse in Australia’s Kimberley region and Sunrise off the northern coast.

While LNG interests in the North West Shelf Joint Venture (NWSJV) and Pluto offshore Western Australia represent the majority of WPL’s interests, Woodside also has a portfolio of non-LNG projects encompassing the production of domestic gas, condensate, crude oil and liquefied petroleum gas in Western Australia.

Financials & Fundamentals

Financials for WPL for the past three years:

 

 2008A

2009A

 2010A

 Sales Revenue ($m)

 6,028

4,391

 4,230

 EBITDA ($m)

 4,732

3,144

 2,812

 EBIT ($m)

 3,777

2,132

 2,039

 Adjusted NPAT($m)

 2,107

1,371

 1,418

 Reported NPAT ($m)

 1,786

 1,824

 1,575

 Price/Earnings

 16.7

 21.9

 23.9

 Dividend Yield (%)

 3.7

 2.3

 2.6

 Net Profit Margin (%)

 34.9

 31.2

 33.5

 ROE (%)

 31.4

 13.9

 12.8

 ROA ($)

 14.5

 7.2

 7.3

 Net Debt/Equity (%)

 42.7

 53.3

 42.1

 

WPL was featured in our By The Numbers and Behind The Numbers two weeks ago, where Bob Kohut looks at a company using fundamental ratios and research. This has been summarised below, or you can click on the links below to view these articles (which open in a new window):

Woodside Petroleum – By The Numbers

Woodside Petroleum – Behind The Numbers

Link to company Earnings Report: Woodside Petroleum Limited Half Year Earnings Report – to Dec 31st, 2010

 

The following table shows the two liquidity ratios for WPL and the ASX Energy Sector.

 

WPL

 

Sector

Current Ratio

.86

 

5.04

Quick Ratio

.76

 

4.

 

By the numbers, it appears WPL has some liquidity concerns.  Since liquidity is all about meeting current debt obligations, let us move on to looking at how WPL is using debt.

Debt or Leverage Ratios

The Debt to Equity Ratio is a measure of how much a company relies on “other people’s money” to operate versus how much it relies on its own money – shareholder equity.  For WPL the D/E Ratio is .421, or 42%. Lower numbers here mean a company is using less leverage, or debt, to operate.

Although larger companies like WPL can generally handle larger debt loads, the D/E Ratio taken in isolation doesn’t tell you anything about possible trends in the use of debt.  Has the company’s debt been steadily increasing over the past years?  

If so, in the case of WPL when you couple a relatively high debt with a relatively low liquidity, you could be looking at trouble if business conditions take a dramatic turn for the worse.  The following table shows Total Liabilities for WPL for the past 3 years:

 

Total Liabilities 2008

Total Liabilities 2009

Total Liabilities 2010

WPL

 7,997

9,498

8,510

 

The good news is that WPL isn’t showing an increasing trend, in fact liabilities declined in 2010.  

Profitability Ratios

 

WPL

 

Return on Equity (ROE)

12.8

 

Return on Assets (ROA)

7.3

 

 

ROE and ROA are measures of profitability and in the case of WPL would seem to support the assumption the company has invested in assets that have yet to begin generating sales.

Return on Assets measures the relationship between a company’s profit and its total assets.  ROE is the preferred ratio here, since there are vast differences in the size of the asset base needed across industries to turn a profit.  However, with the exception of the financial industry, most financial experts think a minimum ROA is around 5%.  You can see WPL is comfortably above that benchmark.

Analysts

The company’s LNG projects paint a bright outlook for Australia’s biggest listed oil and gas producer. Woodside estimates the Pluto and Xena gas fields, located about 190 kilometres north-west of Karratha in Western Australia, contain about 4.6 trillion cubic feet of dry gas reserves. Woodside says the Pluto LNG Project is underpinned by 15-year sales contracts for up to 3.75 million tonnes a year with foundation customers and partners, Kansai Electric and Tokyo Gas, each holding a 5 per cent equity interest in the foundation project.

Cleo Nanni, of Novus Capital says global LNG production of 210 million tonnes in 2010 is expected to grow strongly. “Woodside’s goal is to be a global leader in LNG production by 2015, when world demand is expected to exceed supply,” Nanni says. “This is our premier gas play…a strong buy.’

Cameron Bell of Intersuisse also lists Woodside as his favourite large cap investment opportunity in the oil and gas sector. ‘The main attraction is the dominant LNG position Woodside holds in Australia as well as its strong project flow in relation to LNG developments,’ says Bell. ‘Woodside is pursuing a number of development opportunities, including the expansion at Pluto, which will provide a huge boost to Woodside’s bottom line.’

Only last week George Sakellariou of Investorfirst Securities listed WPL as a buy in TheBull’s 18 Share Tips column. Sakellariou sees the hiring of energy sector veteran and ExxonMobil executive Peter Coleman as its new chief executive as a huge positive for the company. ‘WPL has a solid price/earnings ratio of about 22 times forecast earnings…sales have grown on average by more than 11 per cent in the past five years,’ he says. Sakellariou’s target remains at $65.

Shawn Uldridge of William Shaw Securities has had a buy on WPL for months. ‘With the oil price above $US100 a barrel, we can expect significant upside,’ says Uldridge. ‘On our numbers, Woodside will more than double total output per annum over the next ten years, while our forward price expectations are positive for oil and gas. At these prices, WPL is a mid-to-long term buy and hold,’ he adds.

Mark Goulopoulos of Patersons Securities has also been bullish on WPL for some time. Goulopoulos says that prior to the recent discovery in Western Australia’s Carnarvon Basin, there had been concerns that Woodside wouldn’t have sufficient gas for the LNG expansion and negotiations to buy third party gas had been slow. “The recent discovery will go a long way to confirming sufficient gas for the expansion, which is likely to lead to a significantly higher share price over the medium term,” he says.

Risks

In the case of WPL when you couple a relatively high debt with a relatively low liquidity, you could be looking at trouble if business conditions take a dramatic turn for the worse. With the global economy not yet fully recovered and with wild swings in commodity prices, the risk may not be worth the reward for some investors.

Conclusion

WPL is a well-diversified energy producer operating in seven different business segments. In addition, they have a very stable history of dividend payments.

A quantitative analysis of WPL exposed some concerns about both their liquidity and their debt.  However they are investing heavily in expansion of their LNG capacity and their major project Pluto, although this has had cost overruns and completion delays. Nevertheless Pluto is scheduled to begin generating revenue in 2011 and there are two more in earlier states of development.

What’s more, WPL is planning to issue 700 million in new corporate bonds and the proceeds will retire some existing debt coming due in 2011 and fund continuing operations and expansion. WPL also recently discovered new oil-bearing sands off the coast of Western Australia.

The biggest news of all is the reported rumour that minerals and mining giant BHP is interested in acquiring WPL.  If BHP sees the potential in WPL, then investing in the company might be well worth the risk.

>>Back to the newsletter to view other articles – June 5th 2011  

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