Morningstar Investor users sign in here.

Stocks

Oil price fears boost Woodside's investor appeal

Investors are underestimating the growth potential of the Australian oil and gas company Morningstar says, as coronavirus dampens oil prices.

Mentioned: Santos Ltd (STO), Woodside Energy Group Ltd (WDS)


Investors are underestimating the growth potential of the Australian oil and gas company Morningstar says, as coronavirus dampens oil prices.

Woodside shares - which features as a Morningstar Best Idea for February - have dipped to $33 from highs of almost $36 in mid-January. The global outbreak that hit in early February has slashed oil demand amid stalling manufacturing, travel bans and dwindling air travel.

"But we still think the market unwisely under-prices for growth potential," says Morningstar senior equity analyst Mark Taylor.

Woodside's shares are more than 30 per cent below what Taylor believes they're worth, trading at about $33 at the open on Wednesday versus a $50 fair value estimate.

Woodside Petroleum Ltd (ASX: WPL)

Morningstar rating: Four star | Price-to-fair value: 0.66 | Economic Moat: None

 Taylor views Woodside as a standout energy investment at the right price. 

"Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still," he says.

"China is building several import terminals, and so demand is likely to pick up, helping to bring LNG prices in line with oil prices."

But natural gas is the main game for Woodside, comprising 60 per cent of Morningstar's fair value estimate. In line with this, Woodside's expansion of its gas production in Western Australia's Pluto facility boosted output by 43 per cent during the half.

The addition of a second LNG train added 38 million barrels to its existing 89 million barrels of gas production.

Last week's earnings result for first half 2020 was posted on the basis of the lower output figure. Taylor applauds this, given the period was marred by major maintenance on a couple of LNG projects and Cyclone Veronica, which smashed WA's Pilbara region in March.

Price comparison of Woodside, Santos and Oil Search

WPL v STO v OSH

Source: Morningstar

Taylor also likes the way Woodside structures its LNG distribution, selling more into the spot market than competitors Santos (ASX: STO) and Oil Search (OSH), allowing more upside from higher LNG prices.

"But with the Japan spot price presently plumbing US$3 levels versus the average 2019 contract price above US$9, exposure obviously detracts," Taylor says.

"Despite this, net operating cash flow increased by 6 per cent to US$2.7 billion, aided by favourable working capital moves and lower tax payments."

Woodside's conservative debt levels are another positive, as net debt has declined 30 per cent to $1.6 billion.

This healthy balance sheet should support ongoing dividend payments, despite management's ongoing cash outlay for expansion programs.

"Both operating and free cash flows were better than we'd forecast," says Taylor.
Woodside declared a final dividend of US55 cents (82 cents) a share for the half, bringing the full-year dividend to US91 cents ($1.35).

Taylor expects a sustained 80 per cent payout ratio and a five-year average dividend of $1.60 a share, a yield of 4.8 per cent fully franked.



© 2023 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

More from Morningstar

Despite rally this A-REIT remains undervalued
Stocks

Despite rally this A-REIT remains undervalued

While attractive from a valuation standpoint we do not believe this A-REIT warrants a moat and is highly leveraged.
We advise waiting for a pullback before investing in the world's biggest company
Stocks

We advise waiting for a pullback before investing in the world's biggest company

We’ve raised our fair value estimate and sales forecast, but still see the stock as rich.
7 charts on the AI stock boom one year after ChatGPT’s launch
Stocks

7 charts on the AI stock boom one year after ChatGPT’s launch

These stocks and the key trends behind them are critical for understanding the AI investment landscape.
Why Berkshire Hathaway’s success will continue after Charlie Munger ... and Warren Buffett
Stocks

Why Berkshire Hathaway’s success will continue after Charlie Munger ... and Warren Buffett

Munger’s passing is a spiritual loss for the company.
Morningstar initiates coverage on 3 new shares
Stocks

Morningstar initiates coverage on 3 new shares

There are 2 undervalued names as part of our new coverage. 
3 shares for income investors
Stocks

3 shares for income investors

A dividend screen is a jumping off point for further research.