* Underlying profit falls to $1.70 bln, including impairments
* Reaffirms sees 2014 output steady to 7 pct higher
* Expects higher prices from repriced LNG contracts, more oil
* Shares slip 0.7 pct (Adds analyst comment, clarifies underlying profit comparison)
MELBOURNE, Feb 19 (Reuters) - Woodside Petroleum reported a 17 percent drop in annual underlying profit, missing some analysts' forecasts as costs rose and revenue fell, but forecast an improvement on both fronts in 2014.
Australia's top oil and gas producer, working on the early stages of new projects off Western Australia, Israel and Myanmar to drive long-term growth, said it had succeeded in securing higher prices for renewed liquefied natural gas (LNG) contracts.
That and the resumption of production from its Vincent oil field would boost profits in the year ahead, said Chief Executive Peter Coleman.
"We're also growing our margins. Our anticipated average realised prices across all our products in 2014 are set to increase," Coleman told reporters.
The new LNG prices were "on trend with current regional pricing and traditional regional indexation," Woodside said, indicating LNG prices remained tied to oil prices, rather than being linked to cheap U.S. natural gas prices, even with North American competitors set to enter the Asian market.
Coleman also flagged the company plans to embark on a major cost-cutting effort, much like mega miners such as BHP Billiton and Rio Tinto , which it will outline to investors in the June quarter.
Woodside's growth prospects are now pinned to the Leviathan gas field off Israel, where the first stage of developing 19 trillion cubic feet of gas will involve sales within Israel. A final investment decision is expected in late 2015 on a floating LNG project for the first stage of exports.
The floating plant could be used both for exports of LNG to Asia as well as sending gas by pipeline, with exports to Turkey, Cyprus, Egypt and Jordan under consideration.
Analysts said Woodside was performing as well as it could with the assets it has, but there was little to justify any big move up in its share price in the near term.
"It's hard to see any material positive catalyst in light of the lack of abundance of growth options," said Credit Suisse analyst Mark Samter.
Net profit fell 41 percent to $1.749 billion, as the 2012 result was boosted by the sale of a stake in the Browse LNG project and the 2013 result was hit by $256 million in writedowns on some oil and gas fields, flagged in January.
Woodside's underlying profit in 2013 fell to $1.702 billion from $2.06 billion. Analysts had expected an underlying profit of $1.85 billion, according to Thomson Reuters I/B/E/S, but some of those estimates included oil and gas field impairments while others did not.
The underlying profit was 3-4 percent below forecasts from UBS and JPMorgan.
The profit decline was due to a 9 percent fall in the average price it received for its oil and gas, as the mix of sales was skewed more to gas and costs rose due to production from the Pluto LNG project in Western Australia.
Woodside reaffirmed it expects to produce 86-93 million barrels of oil equivalent (mmboe) in 2014, compared with 87 mmboe last year.
Coleman said the company was looking for acquisition opportunities to boost its volume growth, but said attractive targets were limited.
"What's out there in the market place - most of the volume production is pretty fully priced," he said, while adding that potential targets in North America may be cheap but that was because production was a long way off.