Why the Woodside Petroleum Share Price Dropped Today

What Happened to the Woodside Petroleum Share Price?

Woodside Petroleum Ltd [ASX:WPL] has seen declining share prices over the last three days. WPL shares traded for AU$33.64 a share at 2.25pm today. The ASX was also lower on the day with mixed company earnings. News on the economic front hasn’t been helping — the unemployment rate is the highest it’s been in 13.5 years, rising to 6.4% in January. The Aussie dollar continues its downward trend with a fall in oil price overnight.

Why Did This Happen to WPL Shares?

Let’s look at it from the macroeconomic perspective. We have the worst possible combination of events happening right now — a dramatic crash in energy prices (which directly impacts the bottom line of Woodside), a commodity deflation that threatens the growth of commodity exporting countries such as Australia, poor sentiments resulting from risks in Europe and weakness in China. All of these factors are putting downward pressure on stocks.

However, we just saw consecutive rallies in the stock market due to higher energy prices. The world likes inflation, and the market wants to see higher crude prices. Higher energy prices lead to higher commodity prices, which helps inflate the value of financial assets. Don’t forget that oil crashed after the freefall of iron ore prices.

But last year’s dramatic downturn for oil was due to both demand and supply factors. This time, supply factors played more of a role. Now, the market welcomes any sign of energy reflation, and any sluggishness is disliked.

This is the kind of market we are in now. However, the upside of oil is in a way larger than the downside, because we know the price of oil can’t fall below zero, or even that low. On the flip side, a rebound due to recoveries in demand and supply rationing is a real possibility. The question is when that will happen.

What Now for Woodside Petroleum Ltd?

Woodside is a company that could increase its cash flow per share at 9.7% annualised. That tells you this company has fundamental strength and is able to defend its bottom line. If anything, the company can expand its market share by leveraging on its financial strength.

Will low crude prices impact Woodside? Yes, this ‘perfect storm’ will subside. Buying into healthy companies is a great strategy during good and bad times. Investors may want to focus on the long term prospect of Woodside, as well as the entire sector.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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