Woodside Petroleum

Although Woodside Petroleum’s production for the full year fell 11% to 65m barrels of oil equivalent (mmboe), a 39% leap in oil prices was enough to propel revenue 15% higher to US$4.8bn. Earnings before interest, tax, depreciation, amortisation and exploration (EBITDAX) rose just 3% to US$3.4bn and earnings per share fell 7% to US$1.90. A fully franked dividend of US$0.55 was declared (ex-date 27 Feb) taking the full year dividend to US$1.10 per share.   

Two trends in reported profits are competing for supremacy; the rocketing oil price contributed more than US$1.1bn of additional net profit but lower volumes and higher costs set it back by about US$1bn. This tension, between higher oil prices and higher costs, is impacting the entire industry and is particularly acute in Australia.

From next year, Woodside can at least bank on production growth. The long awaited Pluto LNG project will commence in a month, causing production to surge by 30%. Revenues will undoubtedly rise with the higher output but, as we’ve noted previously (see Woodside hits planet Pluto on 18 Aug 11 (Hold - $36.87)) it’s easy to generate an output if you pour in inputs. The return on capital for Pluto is likely to be close to zero. Even if a second train is built, and there is no hint of that happening yet, returns will be meagre, certainly below 10%. Revenues and profits will undoubtedly rise with the onset of production and management will no doubt hail this as a success but, even before it starts, Pluto is a failure.

Perhaps recognising this, new chief executive Peter Coleman confirmed that Woodside will dramatically increase exploration expenditure and seek new assets worldwide. There appears to be an urge to diversify away from Australia. We’ll watch the company’s moves with interest. The share price is almost unchanged since 18 Aug 11 and we’re in no hurry to act. HOLD.