Woodside Energy: Lower profit outlook, lower LNG prices weigh on the rating, downgrade to Hold

The energy commodities market has had a tough year. WTI has fallen more than 11% in 2023 while Brent Crude Oil has dropped by about the exact same percentage. Natural gas had a terrible first half with a drop of more than 35%. The global LNG prices are also down from the end last year.

Woodside Energy Group, ( NYSE WDS), has also been affected by these trends. The stock has not fallen dramatically (especially on a total-return basis), but I have downgraded it from a Buy to a Hold based on its valuation and weaker technical outlook.

First half wrap-up: bearish oil & gas price trends

Woodside Energy Group, according to Bank of America Global Research is Australia’s biggest oil and gas company. It has an annual production of around 200 mmboe. The company is also one of the top 10 global E&Ps and suppliers of LNG. Woodside Energy Group’s portfolio is mainly composed of large, low-cost LNG assets with a long life in Australia, and high-margin production of oil in the US Gulf of Mexico.

The Wall Street Journal reports that the $44.6 billion Oil and Gas Exploration and Production company in the Energy sector is trading at a low price-to earnings ratio of 5.5 for trailing 12 months GAAP and offers a high dividend yield of 12.4%. The stock has a modest implied volatility of 27% ahead of August earnings.

Woodside announced in late February that its EBITDA for 2022 was only $11.2 billion, which is 5% lower than the consensus estimate. However, revenue of $16,8 billion, up 142% year-over-year, exceeded expectations. The net operating profit was $5.2 billion which is 6% lower than expected. The weaker results were due to higher production costs than expected (we will receive a monthly report on production later this month).

On a macro level, lower oil prices and lower gas prices than a few quarters back should result in lower EPS and an intrinsic value. WDS remains a cash cow, even with lower earnings. Its balance sheet is healthy and low in leverage.

Lower Global LNG Prices in 2023

In April, the annual revenue was reported to have decelerated to +80.4% YOY, while delivered production fell 9% sequentially because of planned outages and season maintenance. However, management maintained its production forecast for the full year.

Recently, there was some good news regarding the Trion Oil project – it was approved as expected. This allowed the oil and gas company to proceed with oilfield development.

Analysts at BofA believe that earnings will fall sharply in 2018 before rebounding the following year. The 2025 per share profits are then expected to decline again. Dividends should also fluctuate along with earnings per share, so that the yield in the future should be lower.

Dividends for FY 2023 are expected to be only $1.26. This implies a yield that is closer to 5%. Woodside’s free cash flow is still a positive. FCF per share will dip this year, before rising in the following quarters. WDS is still a highly profitable business, despite its forward P/E being in the double-digits.

Woodside: Earnings Forecasts, Valuation, Dividend and Free Cash Flows

If we apply a multiple of 12 to the sector and assume that the company’s next 12-month earnings will be $2 (now we are halfway through its 2023), the stock price should be around $24. This is a lower price than earlier in the year, as energy prices are down and Woodside released a weak first-half report. So, I am still unsure about the valuation of Woodside but like its free cash flow story.

WDS: Mixed Value Signals, FCF & High Yield

Wall Street Horizon’s corporate event data shows that the H1 2023 earnings will be announced on Tuesday, 22 August. The company will also release its Q2 production report for 2023 before that. This could cause a spike in the share price later this month.

Corporate Event Risk Calendar

The Technical Take

WDS was on an upward trend in February. The chart is now neutral, just like the valuation. Now I can see a trading band. As I mentioned in Q1, resistance remains at $27, but we now have a wide support zone between $19 and $20. The stock is stuck in a middle range and the high volume of price within this range suggests a “hold” rating.

This assertion is backed up by the fact that the 200-day long-term moving average, which was upward-sloping throughout much of last season, has now flattened. Moreover, I have to admit that the bearish RSI divergence in February was indeed problematic for bulls. WDS should be able to rally above $27. This would set a bullish price target of $35, based on the $8 trading range.

Overall, the chart is less bullish and supports a downgrade from positive to neutral.

WDS: Uptrend Stalls into a Neutral Trading Range

The Bottom Line

I have downgraded WDS’s rating from buy to hold. Weak earnings earlier in the year and lower commodity prices are bad signs. Charts are also not very exciting at the moment. Woodside is still on solid ground with a high level of free cash flow, which long-term investors will appreciate.