Oil Price on toll at Woodside

The tumbling oil price is set to take a toll at Woodside Petroleum which has advised of spending cuts and up to $US400 million of write-downs despite reporting record sales for 2014 which should provide for a healthy final dividend next month.

 

The sales figures of $US1.76 billion for the December quarter were broadly in line with the expectations of analysts, who however are warning that the February 2015 payout will be the last of the good times before the impact of the collapse in oil prices hits home.

"If investors want to look backwards and look at the result it was a reasonably positive result, with positive implications for second half 2014 earnings and dividends," said UBS energy analyst Nik Burns.

"But everyone is now looking forward and in the new world of lower oil prices it's going to be tough from an earnings perspective for Woodside."

Woodside shares sank as much as 1.8 per cent to $34.90, despite a slight recovery in oil prices overnight Australian time. The shares under-performed the 0.8 per cent dip in the benchmark energy index.

In its quarterly report on Thursday the local oil and gas major also reported a step backwards at its Browse floating LNG project, saying that a joint marketing agreement for LNG signed almost three years ago with project partners Mitsui and Mitsubishi had been scrapped. The alliance had failed to yield any LNG sales contracts for Browse.

The ditching of the agreement follows the December decision by Woodside to delay the target date for starting engineering and design work on the Browse project by six months to mid-2015. Many in the market doubt that revised timetable will be met given the plunge in oil prices that is testing the economics of the floating project, expected to cost more than $US40 billion.

"This is consistent with our view that Browse is looking difficult at the moment," Mr Burns said.

"Given they were explicitly marketing Browse volumes and with Browse being deferred it comes as no surprise that they have cancelled that deal."

Woodside did however have some more positive news on LNG marketing, revealing an initial accord to sell 0.56 million tonnes a year to Pavilion Gas, owned by Singapore sovereign wealth fund Temasek, over 13 years starting in 2020. The deal is not connected to any specific LNG project and reflects Woodside's move toward building up an LNG trading business, which would sell both its own gas and gas sourced from third parties.

Brent crude oil prices have more than halved since June amid an oversupply thanks to rising US shale liquids production which the Organisation of Petroleum Exporting Countries has refused to compensate for by cutting output.

The collapse in oil prices is expected to be behind the write-downs that Woodside flagged for its assets for the full-year, which it put at between $US250 million and $US400 million before tax, or as much as $US170 million after tax.

However the write-downs will not affect the profit figure used to calculate Woodside's 80 per cent dividend payout ratio, while an unexpected petroleum royalty rent tax benefit of up to $US90 million for the year, revealed in the quarterly, will be taken into account.

"All things being equal we would expect consensus second half 2014 earnings and therefore dividends to be higher post this announcement than before," Mr Burns said.

"But then going forward we are falling into the abyss of lower oil prices which will flow into earnings in 2015 and therefore dividends so it looks like second half 20145 earnings and dividends will be the best we can expect for quite a while."

Woodside said the slumping price has caused it to revise its 2015 capex, which it had flagged last year should average about $US2 billion.

"In light of the current challenging market conditions which has seen crude oil pricing decrease from over $US100 per barrel in September 2014, to around $US55 per barrel at the beginning of January, Woodside is assessing the impact on near term profitability and cash flows, and revising investment expenditure accordingly," the company said.

The hit to spending, which will be detailed in the full-year results on February 18, is expected to be concentrated in exploration, which Woodside had signalled last year should increase this year.

But the tumbling oil price had a relatively mild impact on Woodside's December quarter sales, which still climbed 6.9 per cent from the year-earlier quarter but slid 10.1 per cent from the September quarter. The revenues brought full-year sales to $US7.08 billion, up 22.5 per cent.

Production for the December quarter was 0.9 per cent up on the same quarter in 2013, at 23.4 million barrels of oil equivalent (boe).

Woodside for the first time gave a specific target for 2015 production, of between 84 million and 91 million boe, down from the 95.1 million boe recorded for 2014. It advised that a scheduled one-month shutdown of its $15 billion Pluto LNG venture would reduce output by about 3.4 million boe from 2014 while declining oil fields would account for another 2.2 million boe reduction.

The 2015 production guidance does not however take into account the acquisition of the Balnaves oil project in WA that is part of Woodside's $US2.75 billion deal with Apache Corporation that was announced in December and has yet to complete.

On the exploration front, the quarter was disappointing with Woodside reporting that two wells drilled in the Outer Canning Basin had failed to find gas, while a third is still in progress.