Broker says Woodside share price weakness is a buy opportunity

Happy man standing in front of an oil rig.

The Woodside Energy Group Ltd (ASX: WDS) share price is under pressure again on Friday.

In morning trade, the energy producer’s shares are down 1.5% to $30.12. This latest decline means that its shares are down 16% over the last six months.

As a comparison, the ASX 200 index is up approximately 10% over the same period.

This means that the Woodside share price is underperforming the benchmark index by a sizeable 26%.

While this is disappointing, one leading broker believes this could be a buying opportunity. Especially after the oil price hit US$90 a barrel this month.

What is the broker saying?

The team at Wilsons believes the underperformance in the its share price is largely due to lower prices of liquid natural gas. It notes:

Australian energy stocks have lagged behind the price of Brent crude oil (in Australian dollars) and global oil majors so far this year (2024). This underperformance is likely due to lower prices for liquid natural gas (LNG) from Japan and Korea (JKM), which have fallen ~15% year-to-date. […] WDS has a larger share of its LNG production uncontracted. This exposes WDS more to gas price swings than STO, which has a higher proportion of contracts indexed to the rising oil price. This difference in contracting strategies explains WDS’s recent underperformance.

However, Wilsons remains positive on LNG demand over the medium term. This is thanks largely to the Asian energy transition. It explains:

From a bigger picture perspective, the LNG supply-demand dynamic remains attractive over the medium term. Gas demand in non-OECD Asia is expected to almost quadruple by 2040, driven by the combination of population growth, economic progress and industrialisation in the Asian markets. LNG is set to be a key component of the energy transition across Asia.

And with LNG supply growth expected to be limited in the coming years, this bodes well for prices moving forward. The broker adds:

Meanwhile, supply growth will be relatively limited over the next few years and Russian gas supplies will likely remain to some extent excluded from the European market. […] Therefore, the softness in the global gas market is seasonal rather than structural and the outlook is still positive.

Woodside share price undervalued

Overall, Wilsons believes that the current Woodside share price is undervalued based on current oil prices. So much so, it has named the company as its preferred pick in the Australian energy sector. It named five reasons for its bullish view:

1. Australian oil and gas stocks are an opportunity at current levels. 2. Earnings upgrades will flow through if the oil price continues to remain elevated. For example, WDS should see 15% FY24 earnings per share (EPS) upside at spot oil. 3. The LNG market will recover, boosted by demand coming from Asia over the next few years. 4. WDS is now trading at implied oil prices from ~$70/bbl. This is attractive considering our base case that the oil market will remain tight over this decade. 5. WDS trades well below global peers on an earning-to-value/ earnings before interest, taxes, depreciation and amortization (EV/EBITDA) basis.

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Motley Fool contributor James Mickleboro has positions in Woodside Energy Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.