Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Woodside fair value unchanged despite energy boom: Morningstar

Nicola Chand  |  08 Apr 2022Text size  Decrease  Increase  |  
Email to Friend

Morningstar analysts left Woodside Petroleum’s fair value unchanged following a quarterly review, saying that the soaring energy prices driving bumper profits at the producer are likely to fade.

Natural gas markets often experience mismatches between supply and demand, says Morningstar’s senior equity analyst Mark Taylor. Acknowledging the recent “staggering” price rises, he notes that disruptions are likely to normalise and help ease today’s unsustainable prices. Futures markets expect liquefied natural gas (LNG) prices to fall from 2023.

“Aside from near-term dividends, and balance sheet bolstering, we think the benefit of higher prices is likely to be transitory,” says Taylor.

“We don't expect high prices to persist much beyond 2023 as disruptions normalise,” he added.

The four-star rated stock closed on Friday at $32.40, below Taylor’s unchanged $40 fair value.

After lagging the S&P/ASX 200 index since the pandemic, Woodside Petroleum (ASX: WPL) was the third best performing stock on the local bourse in the first quarter. Shares are up 51% this year.

Australia’s largest oil and gas producer paid shareholders the second largest dividend on record, $1.46 per share, in late March.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Taylor describes higher energy prices “fantastic for earnings in the short term” as he upgraded the 2022 and 2023 dividend per share forecasts by 94% and 134% respectively.

However, his base case sees prices retreating closer to historic levels from 2023 as oil and gas markets normalise.

Natural gas markets have been in turmoil since mid-last year. Moves to limit coal use in China, a dip in renewable energy output in Europe and limited natural gas supplies sent European and Asian LNG spot prices soaring between August and October last year. Russia’s invasion of Ukraine reignited prices over fears that war and sanctions could disrupt exports from the world’s second largest natural gas producer.

Energy markets remain volatile. Brent Crude oil and Asian LNG are down 21% and 47%, respectively from their March peaks as lockdowns in China weigh on demand, and the US and its allies release emergency stockpiles of oil. Near-term movements will be influenced by how the war in Ukraine evolves, says Taylor.

“Will the Ukraine conflict end in a week, one year or five? It's anybody's guess,” he says.

Special dividends and buybacks are on the cards should today’s strong cash flows continues, adds Taylor.

The cure for high prices is high prices

Today’s record prices have the potential to become self-defeating if they persist over the mid-to-long term, says Taylor.

Unsustainable energy prices may push major consumers towards alternative fuels or spur investment in renewables, he notes, referencing the United Kingdom’s decision in March to launch a new body called Great British Nuclear.

Prime Minister Boris Johnson pledged to build eight new nuclear power plans on Thursday as part of a new strategy to cut emissions and wean the country off foreign energy.

Merger paying off

Woodside is set to reap the benefit of changes made over the past year, including its merger with BHP’s petroleum business and updated contracts for its natural gas sales.

Set to complete in June, Woodside’s merger with BHP Petroleum will create one of the largest oil and gas companies in the world, and more than double production at a time when prices are soaring.

The local producer is also benefiting from increasing the number of its long-term supply contracts that are priced relative to natural gas, as opposed to oil, says Taylor. Roughly a quarter of Woodside’s production will be priced relative to gas benchmarks in 2022, up from 16% last year. Gas benchmark prices have risen as much as 570% since 2020.

is a wealth and finance journalist with Morningstar

© 2022 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 information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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 licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend