Woodside Petroleum Ltd – Performance, Operations, And Risk Management

Operation of the Company

Woodside Petroleum Ltd is Australia’s leading natural gas producer. The company has operated since July 1954 with significant growth to meet the global demand. The company enhances safer and sustainable operations with significant help in reducing global emissions and community support. The company is the largest of Australia’s independent dedicated oil and gas companies, with a stock price of A$31.42 billion with over 3,300 employees. However, Woodside Petroleum LTD faces many potential risks of the financial assets like foreign exchange, interests, operation, commodity, and credit risks that may occur when there is a loss of value of bonds or stock in the market conditions. Therefore, this study critically assesses Woodside Petroleum Ltd as an oil and gas company to discuss its performance, operations, and products specialty to evaluate potential risks and determine how the company utilizes derivative securities in risk hedging, investment, and arbitraging discussing the risk hedging practices by using specific derivative security in hedging specific company risks. The report also presents the company’s appropriate hedge ratio and the contacts carried out by the firm.

Website Link: https://www.woodside.com.au/

 

The risk management process in the organization is critical since it will prevent the organization from any losses and help in the price reduction of the company commodity. And one of the risk management approaches applied in this account is the derivative approach (Gahlot et al., 2010). This is the agreement made by both buyer and seller to fundamental assets at some future time. Hence, some derivative approaches are future dates and options. The report shall investigate Woodside businesses that operate in the country. The company operation approach and risk coverage and hedging methods are critical in hedging those risks. The term hedging risk in the organization denotes risk reduction because there is a minimal chance of eradicating risk (Kim et al., 2004). Still, using the hedge as an instrument to curtain risk can reduce such risk.

Woodside Petroleum Ltd is grounded in Australia and significant in the making and exploration business. The organization is the largest dealer of oil and gas in the country (Longley et al, 2002). Woodside energy business is also the highest enthusiastic gas and Oil business in the country. The company also operates in the Australian Securities Exchange as the most significant public company. The main business office is in Perth, part of Western Australia. The business was established on 26th July 1954. Woodside Company limited was termed after the small city of Woodside (Longley et al, 2002). In the early existence of the operation, the company was on Victoria’s Gippsland Basin. After the company moved to the northwestern part of the country in the 1961s, Woodside Company shared with Burmah oil and Shell to formulate the primary stakeholder. In around the 90s, Shell and BHP decided to retail about 35% stake in each stock. 

Table 1: Woodside Petroleum Ltd 5-year Financial Trend (AUD millions)

In 2001, Shell Company was willing to purchase the outstanding share of the organization that Shell ltd did not hold (Brennan, 2004). Nevertheless, such buyout was stopped by the national treasury of Australia. In 2010, Shell business traded one-third of their 33% share of the company to institutional investors at the price of $43.23, which reduced its inclusive share in the company business to 24%. Around Jun 2014, Shell Company broadcast a drop of its stake 22.1% to 4.6% through the deal on the marketplace to other stakeholders and purchase back by Woodside Company Limited.

The business’s produce includes Liquified Natural Gas, liquefied petroleum gas, natural gas, and pipeline natural gas. Woodside business holds attentiveness in the Northwest Shelf projects situated in the Western part of the nation; the company controls a fleet of floating oil production that includes offloading and oil storing provision in the country (Mayman, 2001). The exploration portfolio of the business in the country consists of emerging and frontier provinces in the country and another part of the Asia-Pacific region, Atlantic and Sub-Saharan.

Fiscal Year	Revenue	Cost of Goods Sold with D&A	Cost of Goods Sold without D&A	Gross Income	Depreciation & Amortization Expense
2017	5186	2814	1177	2372	1637
2018	7018	3810	1749	3208	2061
2019	7012	4315	1807	2697	2508
2020	5229	4676	1980	553	2696
2021	9276	9276	3131	3854	2290

Source: WSJ Markets 

Woodside Petroleum Ltd is the portion of the Australian Securities Exchange (ASX) registered business. It received a Net profit of US$1022 million on the operating revenue that amounted to US$3909 million for the period ending 31st Dec 2021. However, after assessing the company’s five-year financial performance trend from 2017 to 2021, the sales revenue grew significantly from AUD 5186 in 2017 to 9276 in 2021, recording a 77.38% sales growth (WSJ Markets, 2022). The gross income also increased from AUD 2372 million to AUD3854 million. Other financial performance messages like the cost of goods sold and depreciation also increased, as presented in table 1. 

Figure 1: Woodside Petroleum Ltd 5-year Financial Trend

Commodity price risk in the company is always instigated by the product’s price movement that touches the organization’s balance sheet and the cash flows of the business. The commodity price in the company can influence the production of the commodity and even the customer that depends on such commodity (Oxford Analytica, 2016). The risk comes out from an unpredictable change in the commodity’s price in the business that can bring down the business profit margin. The company business is untied to the temporary instabilities of the cost of crude oil as the firm primarily focuses on different types of petroleum products that are exaggerated by the change in the economic circumstances. Without any available risk management, the company can suffer a significant loss if the commodity’s price reduces (Kraal, Mulder & Perey, 2020). The hedging approach can be accepted to stop the likely losses that the commodity prices might instigate. 

The Risk Exposure to the Woodside Petroleum Ltd

Commodity risk occurs from an unexpected increase in commodity prices are caused by politics, weather, market conditions, seasons, and technology, reducing the buyers’ profit margin and making budgeting challenging. For instance, Woodside Petroleum Ltd states that it met operating income falls by $2 billion when oil price decreases by $10. Also, their operating cash flow drops by $2 billion if the oil price drops by $10 (Goyal, 2020). Between 2013 and 2016, the oil price derped by $70 which was over $70 per barrel, which reduced the cash flow by $17. However, since the company had taken commodity futures and options contracts traded on significant commodity exchanges, the company was not affected because they used futures and options to hedge against commodity price risks. Hence, hedging the risks through futures and options, prevents the fall in its operating income.

Liquidity risk in the organization that has been advanced from insufficient profitability of a venture that cannot be sold or bought fast to dismiss or minimize any loss in the company. It starts from the financial liability of the organization and the organization’s capability to encounter its obligation to reimburse its financial liabilities as and even when such liabilities are owed. The liquidity spot of the business has always been organized to guarantee that there is enough liquid money to meet the organization’s monetary obligation appropriately and cost-effectively (Er & Hushmat, 2017). When finding the glassy of an organization’s liquidity risk, management, shareholders, and creditors must apply liquidity measurement ratios. The liquidity spot of the business is continuously evaluated through the company business’s cash flow estimation to find the liquidity situation and uphold specific liquidity levels in the company. As of 31st Dec 2021, the business had a total of US$2942 million of total cash and liquid assets that can be helpful at the time of company financial obligation.

For Woodside petroleum Ltd, the company might fail to get a buyer and its assets when the market drops. For instance, assets worth $500,000 might be sold less than $300,000 when the company needs quick cash, but when the market moves, the price can be $800,000. Therefore, the company hedges against the risks by converting its short-term debts into cash before investing in long-term illiquid assets.

Credit risk in the organization is the risk that any shareholder or defaulter in the organization flops to meet their responsibility under financial gadgets that result in a financial loss to the business. Credit risk advances from the organization’s financial assets that comprise trade and any other receivable and even bonds with the financial institution in the country. By allocating outlay grade credit rating counterparties, the business controls its credit risk level. Any counterparties that need to trade grounded on a leaky credit agreement are always subjects to credit authentication policies (Foerstere et al., 2017). Receivable balances in the organization are always observed on an ongoing basis. The business’s extreme credit risk is partial to the value of its financial assets.

Commodity Price Risk

Credit risks are the possibility of losses resulting from failure to pay the loan or meet contractual obligations. It can cause a lender to fail to get the interest, and the principal interrupts cash flows and increases collection costs. However, Woodside Petroleum Ltd hedges against these risks to prevent such losses and cash flow interruptions. For instance, the company may not want to spectate on prices and thus, sell futures contracts of a particular period at the current prices through forwarding hedge. Woodside Petroleum Ltd purchase credit risk future contracts against the loanees’ failure to pay the interests and principles (Hall, 2021). Assuming that the company purchases a seven-month future of $70 per barrel of oil, the prices drop to $65. the company shall sell at $70 ($65+$5=hedging profit of $5) without a loss. But when it increases to $80, the company sells at the loss of $10 and a price of $70 (80-70=hedging loss of $10). The company may face exchange rate risks, interests rate risks, worsening fiscal terms, IT security, competition from technologies, human capital deficits, and uncertain energy policies. The table below shows the total receivable of Woodside Petroleum business. 

a)      Receivables (current)	2021	2020	2019
	US$M	US$M	US$M
Trade Receivable (1)	284	198	160
Other receivable (1)	109	142	125
Loans Receivable (2)	87	104	136
Dividend Receivable	2	2	2
Total	482	446	423
b) Receivable (non-current)
Loans Receivable (2)	141	162	184
Defined benefit plan asset	14	10	6
Total	155	172	190

Derivative securities are complex financial securities set between two or more parties. However, Woodside Petroleum Ltd utilizes derivative securities to trade different assets and access specific markets. The underlying assets for derivative securities are bonds, stocks, currencies, commodities, market indexes, and interests’ rates. The company has utilized derivatives in risk hedging, investments, and arbitrage from 2019 to alleviate credit, commodity price, and liquidity risks, among others. In 2019, the company made a gain of US$2 million on hedges total hedges. The interests’ risks were hedged against through the “AASB 2019-3 Amendments to Australian Accounting Standards – Interests Rates Benchmark Reform.” (Woodside Petroleum Ltd, 2019). Also, the 2019 annual report indicates that Woodside held several cross-currency interests rates swaps, converting fixed interest CHF bonds into variable interests US debt. They also hedged liquidity risks whereby 31st December 2019 had a total of $6.952 million available under facilities and cash disposal. This allowed investors to use derivatives to hedge a position, speculate on the asset, and increase leverage for investments. The company made a measurable amount of hedge gain, which signifies the selection of the most appropriate derivative securities.

In 2020, the company commenced the hedging activities in the first quartet to respond to the lower and volatile gas and oil prices. They applied commodity hedging where a total of 13.4 million barrels of oil production was hedged at a minimum of $33 million per barrel. This shows that when the price goes over $40 million per barrel, the company will lose $7 million (Woodside Petroleum Ltd, 2020). they used commodity swap and call option derivative financial instruments to hedge price risks in 2020. however, they made a total of USD82 million hedge gain by mid-2020. Also, the company utilized arbitrage by combining two derivatives and assets sold for different prices, which allows an arbitrager to sell at high prices and buy at low prices earning risk-free profit from the transaction without using any capital. The profit occurs when the company determines the likelihood of the bonds or stock losing value in the market conditions. Therefore, hedging limits the risks of financial assets with a company. Since the company made a considerable gain in the securities derivatives, we conclude that it selected the most appropriate option of derivative securities.

Liquidity Risk

The company used foreign exchange forward and commodity swaps to hedge the increased percentage of its exposure to commodity price and foreign exchange risk (Woodside Petroleum Ltd, 2021). By the end of 2021, the company had hedges of approximately 13.9 MMboe at an average hedge price f $73.60 per barrel. However, in 2021, the company lost USD390 million on hedges. They measured commodity price risks through stress testing, and they utilized monitoring where commodity was derivatives to hedge their exposure. The company hedged a net liability of $431 million to commodity price risk. However, they exposed a sum of $10 million to foreign exchange risks through forwarding exchange constructs derivatives for foreign exchange risks. Under this circumstance, the company made losses which indicates that it did not sect the most appropriate derivatives that need to be critically reviewed in 2022 to ensure that it does not make losses (Haque et al., 2022). Table 3 is a summary performance of Woodside Petroleum Ltd for their years.

(U.S million)	2019	2020	2021
Types of securities derivatives	Forward contracts, future contracts, Swaps, options and commodity derivatives	Forward contracts, future contracts, Swaps, options and commodity derivatives	Forward contracts, future contracts, Swaps, options and commodity derivatives
Hedge gain	2	82	-390
Risks hedged	Credit risks, Interests’ risks, liquidity risks, commodity price risks, financial exchange risks	Credit risks, Interests’ risks, liquidity risks, commodity price risks, financial exchange risks	Credit risks, Interests’ risks, liquidity risks, commodity price risks, financial exchange risks
Interest on derivatives	12	10	15
Fair value gain/(loss) on derivatives	17	38	25
Price per barrel	–	33	73.60
Fair Value of Financial Derivatives	33	43	46
Depreciation & Amortization Expense	2508	2696	2290
Operational profit before gain/loss on derivatives	2697	553	3854

Source: Woodside Petroleum Annual Reports

Woodside Petroleum Ltd has increased likelihood of experiencing the risk associated with commodity prices, liquidity and credit among others. Through examining the two situations, we can exemplify that the price of crude oil in the country increase and the business made the good decision by hedging its risk out. And in case the price of crude oil reduces the company would get the oil product in low-priced, but due to hedging its total price of the product remain the same after lid up their losses. The hedging approach is better choice for any business that needs to take the short spot since the price movement of the products are uncertain in the market (Fernando et al., 2017). And if the business is unprotected to the risk, after analyzing the future price of the commodity, the company should make the conclusion whether to hedge or not. Hedging approach can the done if the business needs to eradicate the risk that upsets the financial position of the business.

The hedging approach provides a better means for both traders and investors in the organization to mitigate any market risk and volatility. The approach helps to minimize the risk that might occur in the organization (Fernando et al., 2017). The chance that Woodside Company can face in the market is part of the integral part that should be looked into for the business to make a profit for the investor. The hedging approach in the organization might not stop any losses, but it can lessen the impact of negative impact on the organization. There are three types of hedging approaches that can be used in the organization namely future contracts, forward contracts and Money markets.

Forward Contract; This approach involves two parties in the market for the purchase or selling of the community on the quantified data at a specific price (Ferriani & Veronese, 2022). The contract cover forwarding exchange contracts for commodities and currencies.

Web link: https://www.elearnmarkets.com/blog/forward-contract/

Future Contract; A futures contract in the business is the contract between two groups in the organization that involves buying and selling a product on the agreed price and quantity on a specific date. The approach covers various contracts like future currency contracts (Balcilar, Gabauer & Umar, 2021). Agreeing to CME business, the agreement unit of crude oil will be 1000 Barrels. The price quote will be in U.S Money and cents per Barrel. In case there are about 200 agreements per Barrel. The sports price of October 2022 is 74.26 (Buehler et al, 2019). The future price of the product is at the table beneath.

Month	22-Nov	22-Dec	23-Jan	23-Feb	23-Mar	23-Apr	23-May	23-Jun	23-Jul
Future price	72.14	72	71.96	71.98	71.85	71.83	71.57	71.66	71.42

Source: Woodside Petroleum 2022 Financial Report

For the hedging risk, Woodside petroleum business has entered a 9-month future agreement with an extended spot of the contract from July future price (FP) is at $71.42

Total number of Barrels= number of contract x Contract unit; 200 x1000 9  =200,000 Barrels

The 9-future price of the company will = future price x total number of Barrels; 71.42 x200, 000 =$14,284,000. And in any case, the Price of the barrels increases by 10% at the maturity date that was set. The amount shall reach a Price increase by 10%= future price x1.1 = $14,284,000 x1.1 ($15,712,400). In case the price of crude oil increases by 10% in the market at the ripe date, the business will earn a profit of; Profit of the business= Amount after 10% increase price-future Price of the commodity = $15,712,400-$14,284,000 = $ 1,428,400

And in case the crude oil spot value decrease by 10% at the set ripe date, the sport price

Loss suffered by the business =Amount after 10% reduces-Future price

$12,855,600 -$14,284,000 = -1,428,400.

Web link: https://economictimes.indiatimes.com/definition/futures-contract

Money Markets; These are market approaches where short-term purchasing, selling, and borrowing occur with a maturity date of not more than one year. The methods comprise various agreements such as money market operation for interest and currencies. In the case of Woodside limited company, we will use Future contracts to analyze any risk and provide calculations. After hedging the business information, the next step is to get the optimum number of agreements (Fernando et al., 2017). In the future, trailing the hedge is a good technique that is implemented to get the effect of day-to-day payments

Number of agreement (N) =(h*Va)/Vf

Then, h* is the hedge variance ratio, Va is the figure of the spot being hedged, Vf is the figure of one future agreement, and Va= figure spot that is hedged in the company x position price; 200,000 x 74.260 =14,852,000

Vf= figure of future agreement x future position price     

 1000 x$71.42 = $ 71420

In case the lowest hedge variance (h*) is 0.5, then the optimum digit of contract to be hedged will be; 0.5 x14, 852,000 = 71,420 (103.97 contracts).

And if crude oil is critical component for the production of petroleum product at the company and it should take purchase choice, the business needs to operate on around 104 contracts, then the possible price of hedging 104 contract be 71.42 x 104x 2,000 = $ 14,855,360 (Millet & Toussaint, 2022). Therefore, hedging is important to the for-producer businesses like the oil and gas segment since the market price depends on the market value of the product. Hedging is the best approach for reducing risk in the organization.

Web link: https://economictimes.indiatimes.com/definition/money-market

Conclusion

In conclusion, Woodside Petroleum Ltd uses risk hedging to offset losses in investment by taking an opposite position in the related asset through volatile indicators, portfolio construction, and options. Woodside Petroleum Ltd hedges risk options by giving the investors the right to sell assets at specific prices at a predetermined time frame. In conclusion, derivative securities are a contract that expresses a group of underlying assets formed between two parties to purchase and sell property, commodity, assess, and other securities. Therefore, companies utilize derivative securities in risk hedging, investment, and arbitrage. For instance, companies use derivatives in risk hedging through options where investors hedge individual stocks with reasonable liquidity. Besides, they can use index options to hedge a more extensive and diversified portfolio of risks and use of a volatility index indicator measures the implied volatility. The risk hedging approach for the business was commenced to lessen the risk and upsurge the company productivity. After looking at the strategies, it can conclude that the industry can make a profit only when the position price at the maturity time verves up, or else the business will partake to accept a loss if crude price depreciates. 

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