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Woodside resilient despite hefty writedown

Prashant Mehra  |  13 Aug 2020Text size  Decrease  Increase  |  
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Woodside Petroleum has posted a first-half loss of $US4.07 billion ($5.8 billion) following a hefty writedown in asset values, but Morningstar senior analyst Mark Taylor says the result is still “impressively resilient”, given the circumstances.

The energy producer last month outlined a one-off $US4.37 billion impairment charge, joining global energy majors in slashing the value of their assets due to a coronavirus-induced slump in oil prices.

Excluding that one-off charge, underlying net profit for the six months to June 30 was down 28 per cent to $US303 million ($423 million).

Revenue was down 15 per cent to $1.91 billion despite record first-half output of 50.1 million barrels of oil equivalent (boe).

Woodside (ASX: WPL) declared an interim dividend of 26 US cents per share, down from 36 cents a year earlier.

Taylor said the underlying profit was better than expected and was a result of a very impressive performance on the cost front.

“The free cash flow was positive and the cash margin at 90 per cent is well ahead of the historical average. I take a lot of positives on that,” Taylor said.

“The proof is the dividend. How many other companies are going to be paying a dividend at the moment?”

Woodside Petroleum (WPL) - 1YR

Woodside Petroleum (WPL) - 1YR

Source: Morningstar Premium

For the half year, Woodside realised an average price of $US36 per barrel of oil equivalent, down from $US51 per barrel it earned in the same period in 2019.

Woodside chief executive Peter Coleman called the disruption in the energy market as unprecedented.

“I would rate the external conditions created this year by the covid-19 pandemic and the oversupply in the oil and gas markets as the most difficult I have seen in nearly four decades in the industry,” he said.

The bulk of Woodside’s impairment—$US3.92 billion—was related to writing down the value of its oil and gas properties and exploration assets.

The company also made a $US447 million provision for an onerous liquefied natural gas supply deal in Corpus Christi, Texas, at a time when several Asian and European buyers cancelled cargoes.

Woodside, however, said its balance sheet strength and disciplined approach to capital management would ensure "appropriate" returns to shareholders.

The energy company had liquidity of $US7.5 billion at June-end and is looking for acquisitions, ideally close to its existing assets or those offering control over producing assets, Coleman said on Thursday.

It has cut capital spending this year and had earlier deferred final investment decisions for the Scarborough project, co-owned with global miner BHP Group (ASX: BHP), and its Pluto LNG expansion to 2021.

Morningstar’s Taylor said the scaling back of sustaining capital expenditure would free up cash flow a little bit but would have no impact on the group’s profits.

The deferring of growth capital expenditure would push out the expected earnings increase from commissioning project expansions by about two years, he said.

But this would have no effect on his longer-term assumptions and expectations, although he will nudge near-term earnings higher by about 9 per cent for 2020.

Woodside shares currently trade around $20.50 each, representing a more than 50 per cent discount to Morningstar’s fair value estimate of $44.60 a share.

Taylor attributes the gap to the difference in the longer-term assumptions of oil prices, with the market marking down valuation based on the current slump, while his estimate assumes a longer-term recovery to around $US60 a barrel.

This article is part of Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

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