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Woodside Petroleum Investors Set for Dividend Shock
 

Investors in Woodside Petroleum are in for a shock in the shape of a sharply lower dividend for the 2015 financial year should oil price stay low, signalling that the upcoming dividend in February could be the last of the good times until prices pick up, according to JPMorgan.
 

Running a calculation on the hit on Woodside’s dividend assuming oil prices stay around $US50 a barrel, the broker found that the payout could slump to just US64¢ per share for the 2015 financial year from the $US2.58 expected for all of 2014.
 

However, under JPMorgan’s current forecasts for Brent crude oil, of $US82 a barrel for 2015, the drop in the payout to shareholders would be much smaller but still significant, with the dividend falling about 42 per cent to $US1.49 per share.
 

Still, in a research note ahead of Woodside’s quarterly report scheduled on Thursday, JPMorgan analyst Benjamin Wilson described the bank’s oil price forecasts as “optimistic” given Brent’s slide below $US50 on Monday.
 

Brent crude oil, the global benchmark, tumbled another 5.6 per cent on Monday to $US47.27 a barrel, bringing the slump since August to almost 60 per cent.
 

Evidence of the impact of the price weakness will be evident in Woodside’s quarterly sales report, but the greater impact of a persistent low oil price would be seen in the 2015 results because of the lag of several months between any change in oil prices impacting prices under liquefied natural gas sales contracts.
 

Woodside in 2013 adopted an 80 per cent payout ratio as its dividend policy, and while the ratio is set to be maintained the decline in the absolute level of earnings from lower oil prices will inevitably feed through to shareholder returns.
 

Shares staying afloat
 

Woodside’s shares have been relatively resilient to the oil price slump compared to some of its peers, falling 14 per cent in the past four months compared to a near-26 per cent slide in the Australian Securities Exchange’s benchmark energy index. The company’s low debt and ample funding capacity has spared it from the worst of the impact so far.
Shares in the country’s largest pure-play oil and gas producer dipped 1.9 per cent on Monday to $36.35.
 

But the extent of the cut to dividends possible for 2015 could still take aback some investors, Mr Wilson said in his note to clients.
 

“Given Woodside’s leverage to oil prices we feel the magnitude of its outperformance relative to peers squarely reflects its strong balance sheet and ability to weather the current storm,” he wrote.
“We caution, however, that the magnitude of earnings and dividend reductions should the current oil price environment persist may surprise some in the market.”
 

JPMorgan also ran the numbers on its valuation of Woodside at current low oil prices, finding that its discounted cash flow valuation of the stock reduces to about $19 a share if spot price assumptions are assumed to persist for ever. That compares with its current valuation of about $42 per share based on its existing price estimates.
 

JPMorgan is forecasting Woodside will report production of 22.5 million barrels of oil equivalent for the December quarter, generating sales revenues of $US1.77 billion. That would still be up on the December 2013 quarter sales of $US1.65 billion, reflecting the fact that the downward acceleration in oil prices only took hold later in the year.
 

The estimated December quarter output would bring full-year production to 94.2 million boe, within the company’s guidance range of 93 million-95 million boe. Woodside made a record dividend payout for the 2013 financial year of $US2.49 per share.
 

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Questions
 

1. In the above article, JPMorgan noted that Woodside Petroleum may be under pressure to reduce or omit dividends on its ordinary shares as a result of a weak oil prices. Carefully examine why the reduction in dividends may harm its shareholders.
 
2. There is evidence to suggest that dividends have a more stable pattern than earnings. According to the article, Woodside in 2013 adopted an 80 per cent payout ratio as its dividend policy. What reasons can you suggest for the management of Woodside adopting a policy of paying a stable dividend in the face of declining earnings from lower oil prices?
 
3. Usually the Board of Directors increases dividend per share only slowly in response to rising profits, and is even more reluctant to decrease dividend than to increase it. Give reasons for this behaviour pattern. Is this behaviour more likely to be observed under an imputation tax system than under a classical tax system? Why, or why not?
 

Note: If you wish to use share price data to support your argument, please go to Google finance or Yahoo finance finding the related information. ALL Calculation should be provided from excel spreadsheet and copied to word document.
 

Your analysis should be clear, concise and well structured. The total word limit is from 800 to 1,000 words. The word limit is the maximum. Students should not feel compelled to write to the maximum. There is no need for an executive summary. The word limit excludes appendices, headings, calculations, calculation tables imported from Excel, figures, and references. There is no +10% tolerance.
 

Assignments Learning Objectives
 

1. Understand the dividend payout policy and the reason why companies follow this policy.
2. Understand the argument why payout decisions may have a signal effect to investors.
3. Understand the imputation tax system and explain how behavioural factors may affect dividend policy.
 
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