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    Investment and Portfolio Management: The Woodside Petroleum Ltd.

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    The Woodside Petroleum Ltd. (http://www.woodside.com.au/Pages/default.aspx) is Australia's largest publicly traded oil and gas exploration and production company and one of the world's leading producers of liquefied natural gas? Woodside has entered into an agreement for the issuance of US$700,000,000 in corporate bonds into the United States 144A bond market. Settlement of the offering is subject to certain customary conditions.

    The bonds will be issued by Woodside Finance Ltd., a wholly owned subsidiary of Woodside Petroleum Ltd., and will consist of US$700,000,000 of 10-year bonds with a coupon of 4.6%.

    The bonds will be guaranteed by Woodside Petroleum Ltd. and its wholly owned subsidiary, Woodside Energy Ltd.

    The funds will be used for general corporate purposes including, but not limited to, repayment of some of Woodside's existing debt, which matures in 2011, as well as the funding of our ongoing capital and exploration program [http://www.woodside.com.au/Investors-Media/Announcements/Pages/Woodside-to-issue-US$700-million-in-corporate-bonds.aspx].

    1) Would you choose to invest in the Woodside Petroleum Ltd.'s bond as part of your investment portfolio? Why or why not? If so, what sort of strategy would you pursue?

    2) Based on your analysis and findings, would you recommend the Woodside Petroleum Ltd.'s bonds to other investors? Please explain your reasoning.

    3) Calculate current price of the Woodside Petroleum Ltd.'s bond (Use market rate of 4% for Woodside Petroleum Ltd.'s bond to calculate current price of the bond. The par value is $700,000,000, of 10-year bonds with a coupon of 4.6%.

    4) Is the Woodside Petroleum Ltd.'s bond overvalued or undervalued?

    5) Does the fluctuation in interest rates impact bond prices? How?

    6) Define investment strategies utilizing fixed income securities and
    Identify key factors in analyzing bond investment risk and valuation

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    Solution Preview

    1) Investing in Woodside is the best way to gain exposure to Australia's rapid rise as a global LPG producer. The product has strong demand, specifically from Asia. If the company goes ahead successfully with all its projects Woodside would be producing about 21 million tonnes of LPG every year by 2020 (Hot stock, smh.com.au). Woodside has vast resources. It trades on a price-earnings of about 25 times which is well above the broader market's 12 times. The company had a good success story in the past which makes the bond attractive. Also, dividend per share rise consistently which suggests that the company wants to maximize shareholders' wealth. Sales revenue increases in the past indicate that Woodside is doing good business and is likely to perform better in the future.

    Woodside requires funds for general corporate purposes which include repayment of some of the company's existing debt which matures in 2011 as well as funding for ongoing capital and exploration program. The issue would take cash and undrawn facilities at $2.2 billion at the end of the year 2011. Hence, looking at the company's history and performance at stock market, I would invest in the bond.

    I would probably use laddering strategy to diversify my portfolio, reduce price volatility and spread out investment risk over a range of potential interest rate environments. The strategy would improve the overall return by spreading maturities of bonds over several years.

    2) Woodside have raised a considerable amount of funds over the two year time period which is understandable to an extent given the capital requirements for large scale projects such as Pluto and Sunshine, however the frequency in which funds have been raised leads to doubts over the current cash flow of the business. With many of the company's projects not due to start production for a few years there is likely to be a shortage of cash flows and continued capital restructuring. Of more concerning nature is the need to raise funds to meet short term ...

    Solution Summary

    The expert examines investment and portfolio management for The Woodside Petroleum Ltd.