Woodside Petroleum 2005 Company Analysis

Woodside reported a net profit after tax of $1,107.4 million for 2005 which is 3.4% lower than 2004 of $1,146 million. However, 2005’s underlying net profit after tax increased by 54.5%. This is because a

significant item totalling $474.6 million reported in 2004 was from selling off the Enfield oil project (Phaceas 2006).

Average oil price has increased 36.8% in 2005 compared with 2004 contributes a $552.6 million to revenue from sale of goods and higher sales volumes raised another A$98.4 million driven by strong Liquefied Natural Gas sales. This corresponds with Howarth (2006), “Woodside’s average crude oil price in 2005 was $72.88, up from $54.19 the year before”. However, these positive amounts are partially offset by the loss from appreciation of AUD against USD, increased cost of sales and total exploration and evaluation expense. As oil production costs increased from $4.27 a barrel to $6.78 a barrel (Howarth 2006). All these lead to decrease in ROE (net profit attributable to the members of Woodside Petroleum Ltd / Total Equity) from 41.4% in 2004 to 31.6% in 2005. If adjusting for significant items, it actually increases from 29.3% to 30.2%.

Current ration (Current Assets/Current Liabilities) has dropped dramatically during 2005 from 2.6 to 0.785. It is largely because of the cash outflow amounting to $564.2 million which was mainly for acquiring Houston-based Gryphon Exploration Company. According to Howarth, “Woodside plans to increase its exploration budget 40 per cent to $500 million in 2006 after spending $346.2 million in 2005 and just $239 million in 2004 (2006)”. Though notion of ‘ideal’ current ratio differs across industries, a higher ratio is normally preferred to a lower one as liquidity is of vital importance to the survival of a business (Atrill, 2000). Meanwhile, payable increased $289.4 million due to the purchase of long-lead items for the Group’s exploration and development activities and the acquisition of Gryphon payable.

However, the truth behind the drop in liquidity is wealth creation for future growth. For example, the acquisition of Gryphon in September 2005 provided immediate production and access to a substantial portfolio of exploration leases and prospects in the Gulf of Mexico. Disruption to oil and gas operation caused by Hurricanes Katrina and Rita 2005 was covered up to 88% of pre-hurricane level by the Gryphon portfolio. The Kipper gas field in Bass Strait will cost $200 million which expected to yield $3 billion of gas and natural gas, with Woodside owned 21 per cent it.

There was no new share issued during 2004 and 2005, and Woodside relied more on borrowing. Long term debts remain at the similarly level around 1000 million due to its industry characteristic. But the net gearing (Net Debt* / Equity) in 2005 has tripled in size compare with 2004 because Woodside has increased their borrowing to meet the cash need. The $729 million gained in equity contributed only a small portion to the gearing. Woodside plans to spend $10 billion in development of new projects over the next five years, and three major projects will start production this year (Howarth 2006).
* Net debt=short term debt + long term debt – cash

Impact of International Financial Reporting Standards (IFRS)
From 1 January 2005, financial statements prepared by Woodside are in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS) instead of Australian Generally Accepted Accounting Principles (AGAAP). The adoption of AIFRS has impact the following areas:

(a) Petroleum Resource Rent Tax (PRRT)
Under AGAAP, PRRT was treated using accrual accounting basis. Under AIFRS, Australia Accounting Standards Board (AASB) 112 extends the tax-effect accounting to encompass all taxes on income. Taxable temporary differences arise because deferred PRRT liability or asset is recognised for the differences that have accumulated between PRRT tax base and the accounting base.

(b) Employee Share Plan
AASB 2 require treatment of employee share plan as share-based compensation, the principal amount of the interest-free, limited-recourse loans to acquire shares are reclassified from receivables to a separate class of shareholders’ equity. Dividend paid on shares issued are retained to repay the loans, are offset against that separate class of shareholders’ equity.

(c) Leases
Determine whether any service contracts contain leases. All leases should be accounted in accordance with AASB 117. Woodside has identified a finance lease which needs to be reported on the balance sheet, lead capitalisation of leased assets into oil and gas properties and the lease liability recorded as interest-bearing loans and borrowings. As a result, the retained earning will reflects the replacement of lease payments expense with interest and depreciation charges.

(d) Functional and Presentation Currency
AASB 121 The Effects of Changes in Foreign Exchange Rates, the Group’s functional currency is Australian dollars and US dollars. Assets and liabilities of subsidiaries with a foreign currency are translated into Australian dollars at each period’s closing date and any exchange movements are recorded through a Foreign Currency Translation Reserve (FCTR).

(e) Borrowing Costs
Borrowing costs on qualifying assets are to be capitalise, this exclude those assets with a value of less than $50 million, all expenses relating to exploration and evaluation, and the foreign exchange differences.

(f) Provision for Restoration
Under AIFRS, the present value of restoration obligations to be recognised as a non-current liability and to capitalised future restoration costs. The capitalised cost is amortised over the life of the project and the provision is accreted periodically as the discounting of the liability unwinds. The unwinding of the discount is recorded as a finance cost, which leads to reduction in restoration provisions.

(g) Investments
Investments in equity securities were held at cost under AGAAP. AASB 139 classified investment in equity as either held for trading (unrealised gains or losses reported in the income statement) or available-for-sale (unrealised gains or losses reported in equity) and carried at fair value. The difference between the fair value of investments and historical cost leads to increase in other financial assets and retained earnings.

(h) Income Tax
Under AGAAP, income tax expense was calculated by reference to the accounting profit after allowing for permanent differences. Under AIFRS, temporary difference arises due to difference between the carrying value of an asset or liability and its tax base.

(i) Defined Benefit Superannuation Fund
Under AGAAP, cumulative actuarial gains and losses on the defined benefit section were not recognised on the balance sheet. Under AIFRS, provision for employee benefits is recognised as an asset and is measured as the difference between the present value of the employees’ accrued benefits and the net market value of the superannuation fund’s assets at that date. The impact would be increase in other assets for the surplus superannuation fund assets and to record the related gain in the income statement.

(j) Embedded Derivatives
AASB 139 requires the identification, recognition and measurement of derivatives embedded within contracts that a company may enter.

(k) Financial Instruments
AASB 132 and 139 require all financial instruments to be initially recognised at fair value. Subsequently, movements in financial instruments are recorded in the income statement.

(l) Hedge of Net Investments
Under AGAAP, US dollar borrowing were treated as a hedge of US dollar sales revenues. However, US dollar borrowing does not meet the hedge accounting requirements under AIFRS.

(m) Sale of Assets
Under AIFRS the net gain or loss on sale of each class of asset is classified as other income or other expenses in the income statement. Under previous AGAAP, proceeds on sale were classified as other income and the written down value of assets disposed were disclosed as other expenses.
(Woodside Concise Annual Report 2005)


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Sprague, J.A “Investors cheer as share prices soar to record on back of gold”, The West Australian, 10 January 2006.