By Paul Rickard

I first invested in Woodside Petroleum 37 years ago in 1978, from memory it was my very first dabble in the share market. I sold out after a couple of years when my investment dream hadn’t quite been realized, and all these years later, it still seems that Woodside is one of those companies that is gonna do it, but never quite delivers on the promise.

At least, that was my impression after listening to yesterday’s analyst briefing by CEO Peter Coleman and CFO Lawrie Tremaine.

Woodside delivered a solid first half result, bang on analyst expectations. In a strong market (including the energy sector), Woodside’s shares added 2.53% yesterday to close at $32.86. But it is with the state of the massive Browse floating LNG (FLNG) project that leads me to question whether Woodside will ever really make it, a bit like the shattered dreams that BHP and Shell must have had in deciding to exit their substantial holdings in Woodside, BHP in 1994 and Shell in 2011 and 2014.

Let’s come back to Browse – firstly, the result.

The result

Net profit after tax (NPAT) of $679 million for the first half was down 39% on 1H 2014, although $1 million better than the consensus forecast. Similarly, the dividend of 66 US cents per share was 1c higher than the 65 US cents expected.

Revenue of $2.56 billion was down 28% on 2014, reflecting a 9.7% fall in production and a 29% fall in the realized price. With medium to long term contracts in place for much of its LNG production, the price decrease of 29% was lower than the 46% fall in the average price for the period of Brent crude oil (Woodside’s benchmark).

On the positive side, Woodside lowered unit production costs, and is on track to deliver opex (operational expenditure) savings of $115 million and capex savings of $180 million in 2015. Woodside refinanced $3.75 billion of debt, taking the average cost down to just 2.6% per annum. Gearing sits at a very comfortable 20%.

Woodside will pay an interim dividend of 66 US cents (approximately 90.0 cents AUD) for the half year, a payout ratio of 80%.

The company didn’t provide any earnings guidance. It did reconfirm the production target for calendar 2015 of a range of 86 to 94 MMboe (million barrels of oil equivalent), which, with the first half production of 42.0 MMboe, means a second half of between 44.0 to 52.0 MMboe

While production will be higher in the second half, Woodside will feel the impact of lower oil prices, with Brent now trading at around $US 48.50 (compared to an average of $US 59 in the first half). This implies a lower second half profit, and if Woodside maintains its payout ratio of 80%, could see a second half dividend of around 55 US cents. If this eventuates, this puts Woodside on a yield of around 5.0%.

Progress on Browse – but will it ever happen?

In June, Woodside persuaded its partners (Shell, BP, Mitsui-Mitsubishi and Petro China) to commence the front-end engineering and design (FEED) phase of this massive project, which could see $40 billion spent on a floating liquefied natural gas (FLNG) development. Located 425km offshore north of Broome, gas from the Browse Basin was originally to be processed at James Price Point. This was abandoned due to rising costs and environmental issues, and a new floating solution embraced. The latter combines the functions of an offshore gas receiving facility, with a gas treatment and liquefaction plant as well as storage and offloading facilities.

The plan is for three large floating production facilities, with drilling scheduled to commence two years post final investment decision and gas production expected to extend for approximately 40 to 50 years. During the FEED phase, engineering work and preparatory procurement work will be progressed on key design elements of the FLNG, subsea and subsurface facilities.

According to Woodside, a final investment decision is targeted for 2H 2016. They seem confident that cost reductions in the order of 20% can be achieved in the upstream part of the project (gas extraction), but less confident that these are available with processing and the vessels. And, with no customer contracts yet in place for the gas, while there are choices about production volumes and phasing, in the current weak market, this remains a very high risk to the project.

Peter Coleman said that to be approved, the investment case would need to deliver a break-even outcome at today’s depressed LNG price, and a 12% to 15% return on investment at Woodside’s long run price. In the current market and with the project’s price tag, this looks pretty challenging and there must be considerable doubt as to whether this project will ever get the green light.

What does Woodside offer the investor?

Woodside does have other growth options – it will drill three high impact exploration wells in the second half in Cameroon, Myanmar and Korea, and the Wheatstone LNG project will start producing gas in 2H 2016. That said, it is starting to look like a fairly mature energy producer. Browse is the “blue sky”, however if it follows Woodside “form”, the betting is that investors will be disappointed.

Despite the growth challenges, Woodside does offer investors a number of positives. It is well managed, capital discipline is strong, gearing is low and it pays a fully franked dividend with a high payout ratio. Importantly, it provides leverage (upside and downside risk) to the oil price, although not as much as the pure oil producers. And then there is the blue sky of Browse.

I think Woodside should be part of your portfolio – and I am in no hurry to sell mine. However, in the absence of a firm conviction that oil prices are bottoming out, I just can’t get that excited to buy any more. Once bitten (or should I say many times bitten), twice shy.

Disclosure: The author and his SMSF own Woodside shares.