Investor Update: Woodside Petroleum
There are several reasons we hold Woodside as the preferred energy exposure and also a standalone investment. Firstly, the oil market and with it the liquefied natural gas (LNG) market are tightening. Oil will be first, this is because around 2014 the oil price collapsed from circa $100/barrel to $50/b then $30/b. Capital expenditure in the industry outside of US shale oil ground to a halt. Usually it takes five years for that lack of expenditure to impact the overall market and we are getting close. Therefore over the medium term oil looks favourable. The LNG market, to which the Australian energy companies are more exposed will take a bit longer due to more supply. However, strong Chinese demand for gas as a clean energy source is helping to tighten the market.
Woodside stands out from a dividend yield perspective in the energy sector. The consensus forecast yield is expected to be 3.5% or 5.6% grossed up in 2018. Peer companies such as Santos and Origin have not declared a dividend for quite some time as they undergo balance sheet repair. Oil Search has an unfranked yield of 1.8%. Therefore, Woodside stands well above the others.
Woodside boosted a gross profit margin of 50% for 2017, at its recent full year results. At current gas and oil prices it is very profitable. The balance sheet is strong, arguably the best in the sector. However, the company harbours growth ambitions to take advantage of the tightening market described above. A surprise to the market was the recent capital raising to fund growth in the NW Shelf, Senegal in Africa and at Woodside’s Browse basin interests. The market was surprised given the current balance sheet strength and also surprised at the large size of the issue at A$2.5b.
The market will take a little time to digest the extra scrip and that has weighed on the share price. The fund took up a large part of the entitlement and also sold some at a profit. The equity raising sets Woodside up for the next phase of growth. The franking balance is healthy (over US$2b) and we expect a solid stream of fully franked dividends for the fund.