Dividends triple, NPAT increases fivefold, and there's more on the horizon

Ally Selby

Livewire Markets

It's not every day that this journalist gets to write about a stock where dividends have skyrocketed thanks to soaring profits, particularly in this market environment. But then again, what else could we expect from a stock that directly benefits from the eye-watering highs of oil and gas prices?

Today, Woodside (ASX: WDSreported its half-year results - boasting a 417% increase in net profits and a 132% lift in revenues. This saw its dividend increase 263% to 109 cents (US) a share - its largest interim dividend since 2014 - a happy day for shareholders, I'm sure. 

But are these kinds of results sustainable? And can investors continue to expect lofty dividends from this oil and gas player over the years to come? 

Hendrik Bothma, of Katana Asset Management, certainly thinks so. After all, Russia's war in Ukraine continues to disrupt global energy prices. To add fuel to the company's fire, gas continues to emerge as an important source of energy in the transition to net zero. And then there's the acquisition of BHP's petroleum business, which retrospectively, couldn't have been better timed. 

So in this wire, Bothma outlines the best of Woodside's result, the risks that could play out going forward, and shares why he is feeling uncharacteristically bearish on the market. 

Woodside (ASX: WDS) key results

  • Revenues up 132% to US$5.81 billion
  • NPAT up 417% to US$1.64 billion 
  • EBITDA up 165% to US$3.97 billion 
  • Free cash flow up 688% to US$2.57 billion 
  • Capital expenditure of US$9 billion over the next three years
  • Liquidity up 31% to US$7.91 billion
  • End-of-year dividend up 263% to 109 cents (US) per share. 

Note: This interview took place on 30th August 2022. This stock is held in the Katana Australian Equity Fund. To learn more about Katana click the link below:

Managed Fund
Katana Australian Equity Fund
Australian Shares
Hendrik Bothma, of Katana Asset Management 

1. What were the key takeaways from this result? What surprised you the most?

The overall result was strong with a beat on revenue and earnings. This didn't come as much of a surprise though - it was always destined to be a record result fuelled by strong commodity pricing and a much larger portfolio following the BHP merger.

NPAT increased more than five times and the dividend more than tripled - it was Woodside's highest dividend since 2014.

With a lot of detail already provided in the quarterlies, underlying NPAT was the key focus of the result following the merger in June. NPAT came in at $1.8 billion, a 414% increase even post the $424 million merger costs in the period, which was better than analyst forecasts.

Perhaps the one surprise was the dividend. Despite paying 109 US cents per share, putting it on a 9% yield annualised, the dividend was a slight miss versus what the street was looking for.

A key takeaway that stood out is the intensive capital expenditure programs that lay ahead with $9 billion planned over the next 2.5 years. Fortunately for Woodside, high LNG and oil prices are driving significant cash flow, which will support this expenditure. 

2. What was the market’s reaction to this result? Was this an overreaction, an under-reaction or appropriate?

I felt like the initial reaction on the open was a slight overreaction, especially with the dividend miss, but they do deserve to be up for the day on a record result and strong outlook.

Despite the miss, the annualised yield of 9% is well above the market average and good for shareholders. As long as commodity prices stay strong, as they are currently, these dividends at Woodside will be sustainable. They do have a heavy CapEx program coming on shortly, but at these prices, they are generating a lot of cash to support it.

3. Would you buy, hold or sell Woodside on the back of these results?

Rating: HOLD. 

I would hold. It ran about 10% leading into this result and is trading at its highest level since 2020. But if we do see a dip, I would build a position at a lower price.

It's definitely a buy over the long term. There has been chronic underinvestment in this sector, so it looks attractive in that respect.

4. What’s your outlook on Woodside and its sector over FY23?

Energy security has become a fundamental issue for markets, particularly in Europe since the Russian invasion of Ukraine. This along with underinvestment in new supply will keep upward pressure on oil and gas pricing which I believe will remain elevated. In fact, 70% of Woodside's business is gas, which has an even longer-term outlook with growing demand in both Asia in Europe.

This is also going to be the first full year post the BHP merger, which should see them realise some synergies and we're excited for what's to come

5. Are there any risks to this company and its sector that investors should be aware of given the current market environment?

The risks are well known - the oil price could roll over, there are still some integration risks around the BHP portfolio, there are a lot of capital projects in the pipeline and there is a risk that costs could blow out, especially in the current environment of rising costs.

As mentioned, they have forecast that they are going to spend around $9 billion over the next three years in capital expenditure, so there is a lot of development in the pipeline and there are obviously risks around that.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general? 

Rating: 4

I would say it's a four - we are more on the expensive side. We are in a tightening cycle and cost inflation is everywhere, and both these elements are bad, not just for consumers, but also for company profits. 

The market had rebounded on the expectation of an interest rate pivot as early as 2023, but Jerome Powell made it clear at Jackson Hole on Friday that this is a hopeful view. Friday was perhaps the jolt investors needed to refocus on the earnings downgrades to come, which based on the indicators I watch, is still in its infancy.

All this is to say that things aren't going to be getting any better any time soon.


Catch all of our August 2022 Reporting Season coverage

The Livewire Team is working with our contributors to provide coverage of a selection of stocks this reporting season. You can access all of our reporting season content by clicking here

........
Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

1 stock mentioned

1 fund mentioned

1 contributor mentioned

Ally Selby
Content Editor
Livewire Markets

Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.