KEY POINTS:
- Oil prices have surged, with key factors including strong manufacturing data from China and the US, OPEC+ production cuts, and Middle East tensions driving the rally
- Woodside has underperformed its peers such as Santos, Karoon Energy and Beach Energy in recent weeks
- Woodside's shift towards growth business models, emissions reduction targets, and potential risks like Senegal's production sharing contracts could impact future earnings and dividends
If oil prices tick higher, then so should energy stocks. At least that is what's supposed to happen.
Oil prices have rallied around 7.4% in the past month, with WTI crude ticking over US$85 a barrel for the first time since October 2023. Some of the key catalysts for the resurgence include better-than-expected manufacturing data from China and the US, OPEC+ production cuts and rising geopolitical tensions in the Middle East.
Over the same time frame, Woodside
WDSshares are up just 2% – this includes the stock trading ex-dividend for 91.7 cents or a yield of 3.0%. This also marks a rather sizeable underperformance against peers such as:
Below, we'll delve into some of the key factors driving the underperformance of our largest energy stock.
The Energy Transition
Historically, our top resource companies were pretty straightforward businesses – dig stuff out of the ground at globally competitive costs, ship it and pay out big dividends to shareholders.
Now, several names like Fortescue and Woodside are going down the route of a growth business rather than an established dividend-paying business. From a moral standpoint, these companies should be applauded for their commitment to the world's energy transition. But in terms of what it means for shareholders, it's a long and costly road.
Woodside's Climate Transition Action Plan (announced on 12 March) articulated its decarbonisation and new energies goals over the short and medium term. Some of the key takeaways from the brief include:
Woodside assembled a range of emission reduction projects, with expectations that net emissions will grow from 6.2Mt of CO2 in 2023 to 7.2Mt (2024-30 average) and then decline to 3.4Mt (2041-50)
LNG plant modifications to cut emissions will be key. Pluto operations represent easy wins (but require substantial capex)
Woodside reiterated the importance of customer demand before proceeding with carbon capture and storage (CSS). The company is targeting a final investment decision for the business by 2030
Woodside reiterated the existing $5 billion budget for new energies and lower carbon services, however, it maintains a disciplined allocation framework
In contrast, global energy giant Shell cut its 2030 target for emissions reductions to 15-20% from 20% and abandoned its 2035 target.
Woodside's "dividend cliff"
Citi analysts cautioned that a shift in Senegal's government could lead to an increase in production-sharing contracts from the current 30% to the global average of 55%. Foreign oil companies often share a portion of the production with the host country in return for rights to explore and extract resources.
"If we increase government take by 10 percentage points, Woodside's earnings per share in 2025-26 would be ~10%/~20% lower respectively, exacerbating the dividend cliff," the analysts said in a note last month.
The below chart suggests Woodside's dividend could drop to 42 cents per share by 2026. This compares to 2022 and 2023 payouts of 253 cents and 140 cents respectively.
Market IndexSource: Citi
Earnings Weakness
From a financials perspective, here's what Macquarie analysts expect Woodside to deliver over FY24-26.
|
| 2023a | 2024e | 2025e | 2026e |
|---|
| 1 | Revenue (US$) | 13,994 | 13,113 | 11,866 | 10,565 |
|---|
| 2 | Adjusted Profit (US$) | 3,320 | 2,390 | 1,658 | 1,153 |
|---|
| 3 | NPAT growth (YoY) | (37%) | (28%) | (31%) | (30%) |
|---|
| 4 | Dividend per share UScps | 140 | 100 | 69 | 48 |
|---|
| 5 | Capex (US$m) | 5,291 | 6,233 | 4,237 | 3,200 |
|---|
Source: Macquarie Research (March 2024)
Interestingly, here's what the analysts were expecting this time last year. As you can see, most key metrics including revenue, adjusted profits and dividends have been cut by around 10-30%.
|
| 2022a | 2023e | 2024e | 2025e |
|---|
| 1 | Revenue (US$) | 16,817 | 13,527 | 13,094 | 11,330 |
|---|
| 2 | Adjusted Profit (US$) | 5,230 | 2,763 | 2,857 | 1,824 |
|---|
| 3 | NPAT growth (YoY) | 223% | (47%) | (3%) | (36%) |
|---|
| 4 | Dividend per share UScps | 253 | 115 | 119 | 95 |
|---|
| 5 | Capex (US$m) | 3,136 | 5,255 | 5,656 | 4,958 |
|---|
Source: Macquarie Research (March 2023)
On the other hand, peers like Beach Energy and Karoon Energy are forecast to grow their dividends and earnings between now and FY26. Here's what the analysts have modelled for Beach Energy:
|
| FY23a | FY24e | FY25e | FY26e |
|---|
| 1 | Revenue (A$m) | 1,617 | 1,724 | 2,007 | 1,899 |
|---|
| 2 | Adjusted Profit (A$m) | 385 | 358 | 557 | 519 |
|---|
| 3 | EPS (A cents) | 16.9 | 15.7 | 24.4 | 22.7 |
|---|
| 4 | EPS Growth | (24%) | (7%) | 56% | (7%) |
|---|
| 5 | Dividends per share (A cents) | 4 | 5 | 9 | 15 |
|---|
Source: Macquarie Research (March 2023)
With this in mind, would you rather invest in Woodside, despite forecasts of lower dividends and earnings over the next few years? Or would you lean towards its peers both domestic and/or international?
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