Woodside: Results 2012

A better than expected contribution from the Pluto LNG project helped Woodside Petroleum post splendid full year results (it has a calendar year end). A 31% increase in production to 85m barrels of oil equivalent (mmboe) drove a 30% increase in revenue to US$6.2bn. Reported net profit jumped 98% to US$2.9bn, although this included a one-off gain of US$974m from the sale of equity in the Browse gas field. On an underlying basis, net profit rose 25% to US$2.1bn. From underlying earnings per share of US$2.53, up 21%, Woodside will pay US$1.30 in fully franked dividends (ex date 25 February).

Pluto has been a remarkable achievement. No project in LNG history has gone from discovery to production as fast. None have been as expensive either. We maintain that, without expansion, the project will earn horribly low returns on capital.

Pluto is, however, generating piles of cash; operating cash flow jumped 55% to US$3.5bn and capital expenditures fell from US$3.6bn last year to US$1.9bn this year. With Pluto complete, and Browse and Sunrise unlikely to see development anytime soon, capital expenditure will remain far lower than it has been over the past five years when US$15bn was poured into expansion. This bodes well for free cash flow and dividends. Debt levels have already fallen substantially, from US$5bn in 2011 to under US$2bn in 2012.

A persistent problem is Woodside’s poor reserve replacement. All oilfields have finite resources which deplete with production. Woodside has to spend cash on exploration and development of new fields or face a slow decline. It has certainly been spending, but without success.

Over the past three years Woodside has replaced just 88% of what it has extracted. Consequently, the company had more reserves in 2009 than today. Management have dedicated almost US$500m to new exploration to alter this, with newly acquired ground in Myanmar and Israel being an immediate focus. Woodside has an awful track record overseas so we’ll be watching progress with interest.

Under the leadership of Peter Coleman, Woodside is generating plenty of cash and, crucially, willing to deploy that cash conservatively. It is a far better business than under the watch of his predecessor. Our previous criticism of the business centred on overly aggressive ambitions that have now been sedated. We’re upgrading our recommendation guide to reflect falling debt and higher free cash flow. With the share price up 10% since 04 Dec 12 (Hold – $34.29), it’s squarely on our radar. HOLD.