Can Woodside hit $40 or is it time to sell?

The merger with BHP Billiton’s (ASX: BHP) petroleum business has arguably had the desired effect of helping to catapult Woodside (ASX: WDS) into the inner sanctum of a top 10 global independent energy producer, and this has helped to bootstrap the share price, which pre-merger traded on lower valuations than its global peers.

Investors have finally been rewarded for their patience.

But despite yesterday announcing its highest dividend since 2014 on the back of a four-fold jump in profits in the first-half to US$1.82bn, there’s growing concern that the share price is starting to look decidedly toppy.

While Morgan Stanley is the only broker that thinks Woodside can nudge the psychological $40 a share barrier, the stock appears to be trading close to the 12-month target of $35.01 (based on brokers covered by FN Arena).

Downgrades

Following yesterday’s half year result, both Morgans and UBS, downgrade Woodside to Hold from Add (target price $34.90), and to Neutral from Buy (target price $34) respectively.

Ord Minnett has also downgraded Woodside to Accumulate from Buy and has a 12-month target of $37.

Then there’s Intelligent Investor which recently revised the sell above $40 recommendation down to $35.00.

Have we hit fair value at $35.00?

While UBS believes Woodside offers attractive exposure to the tight global LNG market, the broker notes the stock is trading above fair value. 

The broker expects the group’s focus on balancing sustainable returns with investment in growth and energy transition capex to temper investors' expectations of additional capital management.

Within a note to investors, the broker suggested that despite offering attractive upside to the tight global LNG market, Woodside is trading above fair value, pricing in spot LNG futures through to Dec-23 and an implied oil price of US$78/bbl.

To put that implied oil price in context, during the last reporting period, prices for a barrel of oil equivalent more than doubled to US$96.40.

While Ord Minnett still believes the group offers good value, growth, and leverage to spot LNG prices, the broker notes management’s seemingly more conservative balance-sheet, heading into a growth period which might disappoint investors.

Dividend bonanza over for now

In sync with UBS sentiment, management warned shareholders not to hold their breath for buybacks and/or special dividends any time soon.

The group has some major capital expenditure commitments over the coming 2-3 years and has guided to a $9bn spend on the Pluto-Scarborough and Sangomar projects by December 2024.

Then there’s capex of $5.9bn for the Sangomar oil project in Senegal.

Based on management's 2022 capex guidance, Morgans suspects the dividend payout ratio could be cut in the short term. 

Fuelling those suspicions, CEO Meg O’Neill notes the need to take a long-term view and in light of the high capital spend ahead, will be looking at credit ratings, and the “ability to pay out.”

“We want to make sure that we’re resilient if there’s a price shock and all of those factors inform our thinking about shareholder returns from period to period.”

Woodside share price snapshot.

What do the charts tell us?

Woodside is trading above its 20-day simple moving average.

This is considered to be the sign of a bullish trend.

There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

Simple moving average (SMA 20)