Financial Analysis of Woodside Energy Ltd.

Question: Discuss about theFinancial Analysis of Woodside Energy Ltd. Answer: Introduction: Woodside Energy Limited is an oil and gas company based in Australia catering to the exploration, development, production, marketing and selling of hydrocarbon products. The products include LPG, LNG, pipeline natural gas and crude oil. The company operates five floating vessels which cater to production, storage and offloading of oil. The exploration portfolio of the company comprises of Australia and Asia-Pacific region, the Atlantic Margins, Sub Sahara Africa and Latin America. The company has grown its capabilities through collaborations in the North West Shelf, one of the worlds most premier LNG facilities. Woodside caters to 85% of the total global supply of LNG. (Woodside, 2016). The company operates both nationally and internationally with its head office in Perth, Australia and additional offices in Australia, Canada, Tokyo, UK, Ireland and New Zealand. (Bloomberg, 2016) Statement of Financial Position The balance sheet reflects the financial position of a company on a particular date. The various items included in the balance sheet of Woodside for the year 2015 are presented below: Item 2014 ($m) 2015($m) %Change Total current assets 4042 1079 (73.3%) Total non-current assets 20040 22760 13.6% Total current liabilities 1941 1304 (32.8%) Total non-current liabilities 5482 7510 37% Total stockholders equity 16659 15025 (9.8%) (Woodside, 2015) Total Current Assets The total current assets of the company comprises of cash and cash equivalents, receivables, inventories, tax receivables, and other assets. There has been a fall in the current assets by a whopping 73.3%. This is majorly on account of a fall in cash and cash equivalents from $3268 million to $122 million. The money market deposits amounting to $3142 million has become 0 in 2015. The company spent cash on acquisition and development of Wheatstone, Kitimat LNG and Balnaves Oil. Also the exploration activity increased resulting in higher cash spending. Payments of dividends amounting to $1730 million also lead to a fall in cash balance. The inventories also fell to the extent of 31%. Total Non-Current Assets The non -current assets comprise of exploration and evaluation assets, receivables, inventories, oil and gas properties, other plant and equipment, other financial assets and deferred tax asset. The non -current assets have increased by 13% in 2015 on account of exploration and evaluation assets and oil and gas properties. The company spent on new acquisitions as well as the existing ones. $4873 million were spent on exploration and development of Kitimat LNG, Balvanes oil and Wheatstone. Also $436 million spent on drilling activity. This investment in properties in oil and exploration assets will help the company in increasing its sales as the capacity has been expanded. Total Current Liabilities The current liabilities comprise of payables, interest bearing liabilities, provisions, taxes payable, and other financial liabilities. The current liabilities have decreased by 32%. This is majorly as a result of a decrease in interest bearing liabilities and the taxes payable have become nil in 2015. The interest bearing liabilities had become payable as they had matured and as such the debt reduced. This has lead to increased short term liquidity as there are less short term obligations. The payables have also increased which constitute both trade payables and interest payable on short term debt. The provisions have been made for restoration of operating locations, employee benefits and other provisions. There has been a decrease in provisions for restoration of operating locations. Total Non- Current Liabilities The total noncurrent liabilities have increased by 37% in 2015. The noncurrent liabilities comprise of interest bearing liabilities, deferred tax liabilities, provisions and other finance liabilities. The increase in noncurrent liabilities has increased on account of interest bearing liabilities which has increased by 123%. The company has increased its debt to finance its acquisition and investment expenditure. This has increased the gearing to 23%; however the gearing ratio is within the range of the companys targeted gearing. The new debt was also raised to refinance the existing debt portfolio. The debt of $4100 million has been raised through 10 year corporate bond, syndicated loan facility and bilateral debt facility agreements. However, the cost of debt of the company is very low at 2.9% which means it has great support from banks and debt market. Total Stockholders Equity The stockholders equity comprises of issued and fully paid shares, retained earnings, shares reserved for employee share plans, other reserves and non controlling interest. The stockholders equity decreased by 10% due to a fall in retained earnings. Retained earnings are profits available to equity shareholders which are not paid as dividends rather retained by the company to fuel future growth. There has been no change in the issued equity capital. There was a purchase of shares reserved for employee share plans, however an almost equivalent shares vested during the year had negligible effect on the total shares reserved for employee share plans. Stockholders Equity Item 2014 ($m) 2015($m) %Change Total stockholders equity 16659 15025 (9.8%) Weighted average number of shares 822,771,118 822,943,960 0.2% (Woodside, 2015) The total stockholders equity has decreased in 2015 due to a fall in retained earnings as a result of low profits available to equity shareholders. The issued share capital has remain unchanged, however, the weighted average number of shares also makes allowance for shares reserved for employees share plans. Since the employees share plans shares have increased, the weighted average numbers of shares have increased. Statement of Profit and Loss Item 2014 ($m) 2015($m) %Change Total operating revenues 7435 5030 (32.3%) Cost of goods sold 2883 3073 6.6% Total expenses (before income tax) 1089 1642 50.8% Any non-operating (extraordinary) gains or losses (26) (153) More than 100% Earnings per common share 293.4 3.2 (99%) (Woodside, 2015) Total Operating Revenues The total operating revenues have decreased by 32%. Based on the geographical locations, the highest revenue comes from Asia, followed by Australia and USA. The revenue has declined due to the increasing oil prices in the world. There is a major fall in revenue from LNG and oil segments of the company. There is over supply of LNG in the markets which has led to fierce competition and hence lowered the total revenue. The change in air quality and climate change is also shaping the demand for LNG. Along with a low oil prices, there has been a reduction in volume of sales resulting in a further decline in revenue. Cost of Sales The cost of sales has increased by 6.6%. The increase in cost of sales is on account of increased depreciation and amortisation costs of oil and gas properties. Even though the revenue has fallen, but the cost of sales has not increased much due to improved operating expenditure as a result of initiatives of the productivity program and favourable exchange rates. There is also a decrease in royalty and excise as a result of lower realised prices. The cost of sales have also increased due to a increase in onerous lease provision made in order to compensate for the difference in look forward value of the Balnaves assets and the lease obligations. The shortfall is due to lower oil prices resulting in lower performance expectations from the asset. Total Expenses The total expenses have increased by more than 50%. Impairments of oil and gas properties account for the majority of expenses for the year 2015 amounting to $1083 million. The largest impairment has been done for Wheatstone assets followed by NWS oil. The impairment was done as a result of dramatic fall in oil prices which compelled the company to take lower price assumptions for short term and long term, thus resulting in a decline in asset values. Other expenses of the company include exploration and evaluation expenditure, general, administrative and other costs, depreciation of other plant and equipment and other costs. Non Operating Extraordinary Loss There was an increase of $96 million in the write off of exploration and evaluation assets which included unsuccessful wells in Australia, Republic of Korea and Cameroon. Earnings Per Share The earnings per share decreased by approximately 99%. (LNG world news, 2015). EPS is the profit per share available to the equity shareholders. The EPS reduced as a result of a fall in profits in 2015. There was no change in the weighted average number of shares. The profits have been very low in 2015 due to lower revenue as a result of significantly lower oil prices and also a fall in sales volume. With lower revenue, the operating expenses were also high as compared to 2014 due to assets impairments done on account of lower oil prices. Lower sales combine with higher operating expenses resulted in lower net profits available to the equity shareholders. Statement of Cash Flows Item 2014 ($m) 2015($m) %Change Net cash inflow(outflow) from operating activities 4785 2376 (50.3%) Net cash inflow(outflow) from financing activities (3119) (58) 98% Net cash inflow(outflow) from investing activities (617) (5456) (784%) Net increase (decrease) in cash during the year 1049 (3138) (399%) (Woodside, 2015) Net Cash Inflow (outflow) from Operating Activities There is a decrease in net cash flow from operating activities by 50%. The profit after tax is the cash component left with the company after deducting all expenses from the revenue. There is a sharp fall in the net profits. Further there is an increase in income tax paid. However, even after a low net income, the company still has high cash from operations of $2376 million. This is because of the non cash items amounting to $2600 approx... The non cash expenditures majorly include impairment of assets and depreciation and amortisation. Other non cash items include loss on disposal of exploration and evaluation assets, gain on sale of oil and gas properties, change in fair value of derivative financial instruments and loss on disposal of investments. There is a fall in the net finance costs resulting in an increase in cash from operations. There has been a decrease in current assets and increase in current liabilities which has further increased the cash from operations. Payments for the year include interest paid, income tax paid, PRRT paid, payments for restoration. There has been no major change in these items; most of them have fallen in 2015 resulting in higher cash flow from operations. Net Cash Inflow (outflow) From Financing Activities Though there is a cash outflow from finance activities, however the cash outflow is much less than what it was in 2014. The increase in cash flow comes from the net of proceeds from borrowings. The company has taken a total debt of $4100 million in 2015 for which it has received proceeds worth $1834 million. This has accounted for the increase in cash flow from financing activities. Woodside has taken this loan to fund its acquisition and exploration activities. The company has paid a dividend of $1730 million despite low profits in 2015. The company has a dividend payout ratio of 80%, and it has maintained the same. The dividends were paid from the cash generated from operations. The cash outflow was higher in 2014 due to repayment of borrowings amounting to $1184. Net Cash Inflow (Outflow) from Investing Activities There is a net cash outflow from investing activities. The outflow has increased by a whopping 784%. The majority of the outflow is for payments made for capital and exploration expenditure and payments for acquisition of joint arrangements acquired. The company acquired Apaches Wheatstone LNG and Balnaves oil interests in Australia and Kitimat LNG project in Canada for a purchase price of $2750 with an adjustment of $921 million. (Stringer, Olson, 2014) Net Increase (Decrease) in Cash During the Year There is a net decrease in cash balance in 2015 by 400%. The decrease is majorly on account of payments made for acquisitions, capital and exploration expenditures and dividends paid. Conclusion From the above analysis of the items of financial statements, it can be concluded that the company is operating in a very challenging environment where the oil prices are reducing and the company has no control over it. The demand for LNG has also reduced due to increasing number of suppliers around the world. The company has delivered a net profit after tax in spite of such challenging environment. However, the company is trying its level best to survive in such challenging conditions by increasing its capacity though acquisitions in Australia and Canada which will enable it to cater to the acquired companies markets. Also the acquisitions bring about new technology which inspires innovation. The company has started an initiative to improve its operational excellence and thereby reduce its expenses. This will reap benefits for the company in the long run. The company has a strong balance sheet as the company has a leverage of 23% which makes it stable. It has more of equity then debt which means it is less risky and can easily growth decisions without any bank interferences. Even after such low profits in 2015, the company still have a positive cash balance after acquisition of capital and exploration projects which have increased its total assets. Woodside has impaired a large part of its assets to bring them to the market value. This means the balance sheet shows the true picture of the assets. The current liabilities have reduced as the company has got rid of short term debt making it highly liquid in the short term. Also the inventory has reduced in 2015; this increases the companys liquidity. however, the company has taken loan of $4100 million to finance its capital expenditures which has increased its gearing to 23%, however, the permissible limit of gearing for the company is 20 -30%, so the gearing is within the limits. There is no change in the issued capital of equity capital. The cash position of the company is strong as the company has a positive cash balance even after paying for its capital expenditures, dividends and other expenses. The cash from operations is $2376 which shows the strong cash position from operations even in such challenging times. The operating expenses were lower resulting in higher cash from operations. The net finance costs were lower in 2015 resulting in higher cash balance. The cash balance has reduced due to acquisitions of joint arrangements which have made the asset portfolio of the company even stronger. Recommendation The profitability of the company has reduced in 2015 as the return on assets and net profit margins have decreased. But this is on account of lower oil prices over which the company has no control. Rather even in such challenging times, the company has been able to make profits and has a profit margin of 2.2%. The short term liquidity has also reduced in 2015 due to a huge fall in the cash balance. The cash was utilized for capital expenditures which will reap benefits in the future. The company has impressive turnover ratios with inventory turnover increasing in 2015 and asset turnover as also remained constant. The debt equity ratio has increased as the company has acquired additional debts for funding its acquisitions. These acquisitions have been strategic to cater to the supply of oil and LNG in the acquired companies markets as the competition in the LNG and oil has become fierce and the company can survive only by increasing its volume of business. The gearing ratio is within the target limit of the company. The company is in a continuous process of acquiring new exploration sites and development opportunities to increase its production of oil and LNG. Also the company has made an initiative to improve its operational capabilities which it has achieved to some extent in 2015. All these efforts are sure to bring results for the company in the future. Hence it is recommended to invest in the company if looking at the energy sector. Reference Bloomberg, (2016), Company Overview of Woodside Energy Ltd., accessed online on 2nd September, 2016, available at https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=8516915 Woodside, (2016), Company Profile, accessed online on 2nd September, 2016, available at, https://www.woodside.com.au/About-Us/Profile/Pages/home.aspx#.V8mFJPl97IU Woodside, (2015), Woodside Energy Limited, Annual Report 2015, Australia Stringer, D., Olson, B., (2014), Woodside to Pay $2.75 Billion For Apache Project Stakes, Bloomberg, accessed online on 4th September, 2016, available at https://www.bloomberg.com/news/articles/2014-12-15/woodside-to-buy-apache-stakes-in-wheatstone-kitimat-lng LNG world news, (2015), Woodsides Profit Nosedives as Low Oil Prices Continue to Bite, accessed online on 4th September, 2016, available at, https://www.lngworldnews.com/woodsides-profit-nosedives-as-low-oil-prices-continue-to-bite/