Sneak preview of Woodside's 2015 profit statement

NO ONE is expecting much good news when Woodside Petroleum files its 2015 profit statement on Wednesday, but from what Slugcatcher has been reading lately the potential flip from profit to loss might not be what attracts the eye of investment analysts.

A more interesting aspect of the post-announcement briefings will be the response of management to questions about growth plans, exploration news and how the company's shortening reserve life might be improved.

What investors want to see here is that the drop in reserves from 20 years of annual production as recently as 2011 to around 12 years today has the full attention of the Woodside board, because too many oil companies in the past have failed to rectify a reserve decline until it's too late and suddenly they're struggling to survive.

That's not going to happen with Woodside, at least not immediately. But there are questions about its reserve position that worry some investment analysts, especially as a lot of oil and gas currently rated in the reserve category might not be developed if low prices persist.

More on reserves and what might be done later. First, a look at the likely financial result from a company which retains top position among Australia's oil and gas stocks.

What caught The Slug's eye as he was dipping into an assortment of research reports on Woodside was an expectation by some analysts that the company's bottom line result might be in the red thanks in part to last month's announcement of $US1.2 billion ($A1.69 billion) in asset value write-downs.

Coming on top of a decline in revenue courtesy of the sharply lower oil price and Woodside could struggle to break-even on a statutory basis, though there should be sufficient cash to pay a reasonably generous annual dividend of around US95c a share.

That forecast payout, based on the consensus tips from eight investment banks, would be significantly lower than the inflated 2014 payout of $US2.55 a share, but in the current climate for oil and gas any payout is a good payout.

The likely Woodside result is for a substantial slide in revenue from $US7 billion in 2014 to $4.5 billion last year, leaving $3.2 billion in profit on a pre-tax and charges basis, boiling down to a net profit of around $1 billion - and then down again after the asset-value write-downs leaving a loss for the latest year.

Investors have already prepared themselves for a tough report, cutting Woodside's share price over the past 12 months from a peak of $A36.94 to $26.61, a fall of 28% which is modest compared with the performance of other oil and gas stocks. Santos over the past 12 months is down 60%, Beach Energy is down by 64%, and AWE is down 75%.

In other words, Woodside remains the go-to stock for investors keen to retain exposure to a sector which has been buffeted by stiff headwinds.

So, if Woodside does report a marginal net profit and even a loss after asset write-offs the company is likely to be forgiven for events beyond the control of management.

Less forgiveness can be expected for events which have been under management control, such as the ill-conceived and poorly executed attempt to merge with Oil Search, a move which was simply embarrassing for the way it floated to the surface like a thought bubble only to be promptly pricked.

The same can be said for the inability of Woodside's exploration team to actually discover anything of much value over the past five years.

Even the latest gas discovery off the coast of Myanmar falls into a category called "potentially interesting", and if the gas is ever booked as a reserve of some sort it can join a huge pile of other gas deposits in locations too remote or too difficult to develop.

The lack of recent exploration success and the failure to add a meaningful level of reserves attracted the attention of analysts at investment bank Credit Suisse last week.

In the bank's pre-profit review of Woodside, Credit Suisse noted that the company had spent $US1.9 billion on exploration over the past five years to book 142 million barrels of oil equivalent, an unacceptable volume given that the company produces around 90MMboe a year.

Furthermore, what has been discovered has come at a cost of $US13 per barrel of oil equivalent, roughly four times the average of global oil majors who have been discovering at $3 to $4/boe.

Growth is what investment banks want to see: growth via discovery or growth via an acquisition.

Wednesday's performance statement - especially the dividend declaration at a time when many resource companies are dumping dividends - will be welcomed, briefly, before the questions swing to those questions of growth, reserves and discovery, or lack thereof.

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