2023-07-05 14:09:42 ET
Summary
- Woodside Energy Group's stock has been downgraded from a buy to a hold due to less favourable commodity prices and softer earnings reported earlier this year.
- Despite a drop in earnings, Woodside remains in a solid position with high free cash flow, which could still be beneficial for long-term investors.
- The company's stock is expected to experience volatility later this month with the release of its Q2 2023 production report and H1 2023 earnings report.
- I outline key price levels to watch ahead of first-half results to be reported in August.
It has been a rough year in the energy commodities space. So far in 2023, WTI is down more than 11% while Brent Crude Oil is off by about the same percentage. Natural gas, meanwhile, had a downright awful first half, falling more than 35%. Global LNG prices have likewise plunged from the end of last year.
These trends have weighed on the Energy sector, and Woodside Energy Group ( WDS ) has likewise been under pressure. While the stock is not down sharply (particularly on a total return basis), I am downgrading the stock from a buy to a hold on valuation and considering its weaker technical outlook.
First Half Wrap-Up: Bearish Oil & Gas Price Trends
According to Bank of America Global Research, Woodside Energy Group is Australia's largest oil & gas company with an annual production of c.200 mmboe and is also a top 10 global E&P and supplier of LNG. Woodside's asset portfolio mainly comprises large, low-cost, long-life LNG assets in Australia and high-margin oil production in the US Gulf of Mexico.
The $44.6 billion market cap Oil and Gas Exploration and Production industry company within the Energy sector trades at a low 5.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 12.4% dividend yield, according to The Wall Street Journal. Ahead of earnings in August, the stock features a somewhat modest 27% implied volatility level.
Back in late February, Woodside reported a weak EBITDA figure of $11.2 billion for the full-year 2022, about 5% below consensus estimates, though revenue of $16.8 billion was higher by 142% YoY, topping forecasts. Net operating profit after tax was $5.2 billion, 6% less than expected. Driving the weak results was higher than expected production costs (we will get a monthly production report later this month).
At the macro level, lower oil and gas prices compared to a few quarters ago should mean weaker EPS and a lower intrinsic value as a result. Still, WDS is a free cash flow cow even with lower earnings and its balance sheet remains healthy with low leverage.
Lower Global LNG Prices In 2023
In April , annual revenue reportedly decelerated further to +80.4% YoY while delivered production was down 9% sequentially due to planned outages and seasonal maintenance, but the management team kept its full-year production outlook.
There was good news just recently with respect to its Trion Oil Project - that was approved (as expected), allowing the oil & gas company to move ahead with oilfield development.
On valuation , analysts at BofA see earnings falling sharply this year before bouncing back in the out year. 2025 per-share profits are expected to then retreat once again. Dividends, meanwhile, should fluctuate with EPS, so the yield looking ahead should be lower than the stated figures right now.
FY 2023 dividends are forecast to be just $1.26, implying a truer yield closer to 5%. Still, free cash flow remains a bright spot for Woodside. FCF per share troughs this year before climbing in the coming quarters. With a forward P/E in the low double digits and a strong FCF yield, WDS remains a highly profitable company, though.
Woodside: Earnings, Valuation, Dividend, Free Cash Flow Forecasts
Further on valuation, if we assume the next twelve-month EPS of $2 (now that we are more than halfway through the firm's 2023), and apply a sector multiple near 12, the stock should be near $24. That is lower from earlier this year as energy prices have retreated and after Woodside's weak first-half report. Thus, I have a hold on valuation but continue to like the free cash flow story.
WDS: Mixed Valuation Signals, High Yield & FCF
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed H1 2023 earnings report to be released on Tuesday, August 22. Before that, the company is confirmed to release its Q2 2023 production report, so that could also drive share price volatility later this month.
Corporate Event Risk Calendar
The Technical Take
I gave color to an uptrend that WDS was in back in February . Unfortunately, like the valuation situation, the chart has turned more neutral. Now I see a trading range. Resistance remains near $27 as I highlighted in Q1, but today we have a broad support zone from $19 to $20. With the stock stuck in the middle, and with high volume by price in this stubborn range, the technicals suggest a 'hold' rating.
Buttressing that assertion is that the long-term 200-day moving average has flat-lined after being upward-sloping for much of last year. Moreover, the bearish RSI momentum divergence I mentioned previously in February indeed proved to be problematic for the bulls. At this point, I would like to see WDS rally above $27 - that would trigger a bullish measured move price objective to about $35 based on this $8 trading range.
Overall, the chart has turned less bullish, supporting a downgrade to neutral on the stock.
WDS: Uptrend Stalls Into A Neutral Trading Range
The Bottom Line
I am downgrading WDS from a buy to a hold. Softer earnings reported earlier this year and less favorable commodity prices are poor signs. The chart, meanwhile, is likewise unexciting right now. Woodside remains on solid footing with high free cash flow that long-term investors can still appreciate.
For further details see:
Woodside Energy: Softer LNG Prices Weigh, Lower Profit Outlook, Rating Downgrade To Hold