Woodside Petroleum Case Study Analysis Help With Solution
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.
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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.
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