Woodside fair value unchanged despite energy boom: Morningstar
Analysts expect any benefit to be transitory with oil and gas prices to begin normalising in 2023.
Mentioned: Woodside Energy Group Ltd (WDS)
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.
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.