Woodside Petroleum

Woodside Petroleum has done what many had hoped but few had expected. The company announced it would pay a special dividend of US63c per share fully franked (ex date 30th April), a capital return of US$500m, and lift its payout ratio from 50% to 80% for the next few years.

The move follows the (unsurprising) canning of the Browse LNG project, an ambition that would have cost Woodside and its partners between US$40bn-US$50bn to develop. With Browse, Sunrise and an expansion of Pluto now unlikely, Woodside’s potential capital expenditure burden has been slashed.

Investors responded with undisguised glee; the share price rocketed 10% the day of the announcement. This tells us something about the state of the market as well as the state of the business.

Yield used to mean defeat; a lack of opportunity. It now translates as shareholder friendly and financially responsible. The market’s reaction will no doubt have been noted by other large resource houses. If BHP Billiton, Rio Tinto and Newcrest Mining aren’t reviewing their capital expenditure plans, they should be.

Yet the announcement also speaks volumes about Woodside, which now faces limited growth options. Pluto has delivered a huge increase in cashflow and a lowly rate of return but there are few new projects. Leviathan will take years to prove and develop. Burmese exploration even longer. The capital return is surely welcome, but it also highlights that production growth will be harder to come by. Exploration and corporate activity will become ever more important for the future of the business. Capital expenditure will be spent, if not developing new projects then buying or finding them instead. All of which suggests the newly target payout ratio will be unsustainable and shareholder joy will be brief.

For now, Woodside is the toast of the sector. In an industry where growth often takes precedence over shareholder value, an important turning point may have been reached. The share price is up marginally since 21 Feb 13 (Hold – $37.81) and we’re sticking with HOLD.