Stock of the Day – Woodside Petroleum (WPL)

Woodside Petroleum failed to win shareholder approval to buy back $2.68 billion of its shares from Royal Dutch Shell. Defeat of the buyback leaves Shell holding a 14 percent stake in Woodside that it intends to sell, which will continue to weigh on the Australian company's shares, an overhang Woodside was trying to remove. The buyback won 72 percent support but needed 75 percent approval to go ahead. Its shares were trading down 1.7 percent at A$41.92 after the final vote count was released, in a broader market down 1.5 percent. Shell, a long-time investor in Woodside, was aiming to sell down its stake from 23.1 percent to 4.5 percent as part of a series of global asset sales to help cut soaring costs and boost returns to shareholders. Shell has long flagged it wanted to sell its stake in Woodside, part of a long retreat from a company it tried to take over in 2001.


WPL International Operations (Source – Company Reports)

Woodside Petroleum is trading on the sector’s fullest valuation while also offering the lowest production growth, the WPL investment case rests largely on maintaining the elevated dividend which in the long term can only be achieved with new projects and new production rather than buybacks. As a result we see WPL’s lack of growth as a more pressing strategic issue than the SHELL overhang and believe these funds would arguably be best directed towards fixing the bigger underlying problem.



WPL Financial Highlights (Source – Company Reports)

Production growth remains a more efficient means of dividend growth than buybacks. Consequently this buyback does nothing to defer the anticipated 40% fall in dividends we expect from 2012 – 2020 in response to falling production. Indeed while we didn’t particularly like the proposed Leviathan deal for a similar all in investment of US$ 2.7 billion it offered 25% EPS growth rather than this buyback just offering 6-9%.



WPL Daily Chart (Source – Thomson Reuters)

The NO vote has seen SHELL left with an unwanted 13.6% stake and potentially exacerbate fears of an overhang, the more pressing concern for the management is that this would follow the recent failures at James Price Point and Leviathan and so would leave management in a growing need for a strategic win and a use for the growing cash pile. As a result the NO vote has merely added to existing pressures on Browse FLNG. We gave a BUY on WPL at $37.55 on 04/02/2014. We are putting a SELL recommendation on the stock at the current price of $41.92.


NOTE - THE FOLLOWING REPORT WAS COVERED IN THE KALKINE DAILY ON 04/08/2014.

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