Growth stock or yield delivering utility?
For Woodside (WPL), the balance is tipping further towards the latter. And as the prospect of the Perth based oil and gas giant's participation in Israel's Leviathan project dims with each passing day, Woodside increasingly is becoming a proxy for the oil price.
Ever since the company committed to an 80% payout ratio earlier this year – an unheard of ratio for a resource stock – Woodside's valuation has been geared more towards the simple relationship between the oil price and its yield.
Taking out the development costs of Leviathan – should the project partners determine a lesser role for gas exports – will liberate a substantial amount of working capital for Woodside, which will hold the Browse field as its only serious development project, cementing its position as a yield play (see Woodside's yield-growth challenge).
Woodside initially agreed to stump up $2.4 billion for a 30% stake in Leviathan, which it described as a once in a lifetime opportunity, and was to provide the expertise to condense the natural gas into liquid form for export by ship.
The project, however, has suffered from significant delays including a challenge in Israel's High Court, while the partners have focused more on regional rather than global exports which could be conducted via pipe.
The lack of major development work could see the company maintain its 80% payout ratio as far forward as 2017.
And with forecasts for rising energy prices, that should translate into higher earnings and increased dividends to investors.
Citi recently raised its earnings forecasts for the company by 5%, 14% and 16% for this financial year, 2014 and the following year based on a revision of oil and gas prices.
A great deal of uncertainty hangs over the price of LNG. Vast new discovery acreages has flummoxed forecasters who have yet to determine whether the increased supply will be matched by demand. Some believe that thermal coal prices will be hardest impacted by the new supply as power generation switches to cleaner fuel.
That uncertainty over price was a major determining factor in last month's decision by Woodside and its partner Shell to opt for the cheaper floating LNG processing technology rather than commit to the $45 billion onshore processing facility at James Price Point advocated by WA Premier Colin Barnett.