Why Woodside's underperformance is a buying opportunity: Wilsons

The recent surge in oil prices to US$90 a barrel is drawing attention to Woodside (ASX: WDS) – but for all the wrong reasons.

WTI crude prices are up around 10.5% since March and trading above US$90 a barrel for the first time since October 2023.

The resurgence in oil prices has seen a strong response in US energy stocks, with the S&P 500 Energy Sector Index up 13.5% over the same time frame.

Woodside, on the other hand, has risen just 1.8%. This return includes the stock trading ex-dividend for 91.7 cents per share (or a yield of around 3.0%).

While factors such as the company's commitment to decarbonisation might weigh on its share price performance, there's a more straightforward explanation for its underperformance.

Why Woodside lags

Australian oil and gas majors have less exposure to oil than global peers such as ExxonMobil, Chevron and ConocoPhillips.

"Woodside has a larger share of its LNG production uncontracted. This exposes Woodside more to gas price swings than Santos, which has a higher proportion of contracts indexed to the rising oil price. This difference in contracting strategies explains Woodside's recent underperformance," says Rob Crookston, equity strategist at Wilsons.

WTI crude (red), natural gas energy hub (green) and LNG export futures (blue) | Source: TradingView

LNG prices have slumped more than 70% since last October, reflecting a broad range of factors. These include soft demand, a warmer-than-expected winter in Europe and stabilising energy output in France.

"Looking ahead, while LNG prices could soften further over the near term, with gas storage levels currently at record highs in Europe and Asia, the outlook for LNG is still positive," said Crookston.

He expects gas demand from developing economies in Asia (non-OECD Asia) to almost quadruple by 2040, driven by population growth, economic progress and industrialisation. In contrast, supply growth will be constrained in the coming years, compounded by potential limitations on Russian gas supplies to Europe. This leaves the market vulnerable to supply stocks and potential spikes in spot prices.

"Therefore, the softness in the global gas market is seasonal rather than structural and the outlook is still positive."

Buying opportunity for Australian energy majors

Australian oil and gas stocks are trading at attractive levels and earnings will tick higher if oil prices continue to remain elevated, according to Wilsons.

Approximately 30% of Woodside's energy production is oil and 60% of its LNG production is indexed to oil prices. "Woodside should see 15% FY24 earnings per share upside at spot oil," says Wilsons.

Woodside is their preferred energy exposure due to:

• WDS has passed peak capex. Free cash flow yields should improve from FY25 and beyond.

• WDS has a stronger balance sheet that is steadily de-gearing over the next five years.

• WDS are the lowest cost producer in Australia, with a barrel of oil cost of $8.30.

• WDS has high quality growth projects in the pipeline with Trion in the Gulf of Mexico, Scarborough off the North West Shelf, and then Senegal Sangomar.

Source: Wilsons