Woodside shares are down 17% in 6 months. Is now the right time to buy?

08/05/2024

A Santos oil and gas worker wearing a hard hat stands in a yellow field looking at blueprints with an oil rig and blue sky in the background

Woodside Energy Group Ltd (ASX: WDS) shares closed up 1.9% on Tuesday but remain down 17.0% over six months.

Six months ago, shares in the S&P/ASX 200 IndexÂ (ASX: XJO) energy stock were trading for $33.54. At market close on Tuesday, those same shares were swapping hands for $27.84 apiece.

So, following on this hefty slide, are Woodside shares a buy right now?

I believe so.

Here’s why.

Is now the time to buy Woodside shares?

The pain for Woodside shares really began back in mid-September. Since the closing bell on 15 September, shares are down 27.5%.

There have been a few company-specific issues that have dragged on the share price over this time.

That includes some issues securing government approval for its flagship Scarborough offshore energy project, some shareholder issues with the company’s environmental action plans, and the failed discussions to secure a merger with rival Santos Ltd (ASX: STO).

However, those issues are now largely water under the bridge. Scarborough is now proceeding on track, and the botched Santos merger is fading into the woodwork.

As for the environmental plans, I’m confident that management will concoct a new plan that shareholders will support without throwing up excessive headwinds for the Woodside share price.

How about the oil price?

Oil and gas prices don’t move in lockstep, but they do tend to follow similar trends.

Back in September, when Woodside shares were some 28% higher than today, the Brent crude oil price reached US$97 per barrel. By mid-December, it had dipped to US$73 per barrel and has been on a bit of a rollercoaster this year, trading for US$84 per barrel on Tuesday afternoon.

This is another reason Woodside shares could be an excellent buy right now. After all, the time to buy these sorts of companies is near their cyclical lows.

And there are good reasons to believe that the oil price is more likely to head higher than lower from today’s levels.

According to Rebecca Babin, a senior energy trader at CIBC Private Wealth (courtesy of Bloomberg), “Over US$7 of geopolitical risk premium has been unwound over the past two weeks as the conflict [in the Middle East] avoided additional escalation.”

However, as much as we hope for an extended and permanent peace, sadly, I don’t think that’s very likely in the medium term.

Disruptions to oil shipments in the Red Sea are likely to continue. And Israel has rejected the latest cease-fire proposals in Gaza as entirely unacceptable. Israel now is pursuing its military operations against Hamas in the city of Rafah.

“Geopolitics is back in the driving seat for crude oil traders after last week’s drop. The demand outlook remains supported by expectations of Fed’s rate cuts,” Charu Chanana, an analyst at Saxo Capital Markets, said.

In other potential tailwinds for Woodside shares, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are also intent on supporting the oil price. The cartel is widely expected to extend its current supply cuts through the second half of 2024.

Even Iraq and Kazakhstan, two members who’ve been cheating on their pledged cuts, have indicated they’ll slash output enough to make up for their earlier overproduction.

Woodside shares and LNG

Another reason I’m optimistic that Woodside shares present a longer-term bargain at current levels is the growing realisation that natural gas (LNG) is crucial to Australia’s, and much of the world’s, transition to renewable energy sources.

Last week, Energy Minister Chris Bowen flagged the need for companies to source new gas supplies.

“Slogans like ‘gas-led recovery’ and ‘no new gas’ are equally catchy â and equally unhelpful to explaining the proper role of gas in our net zero energy mix,” Bowen said (quoted by The Australian Financial Review).

Bowen added:

Gas will play an important role in electricity by firming and peaking renewables… While technologies like green hydrogen will be vital â and I am very optimistic about Australia’s role in the global hydrogen supply chain â there are not yet substitutes for gas in many industrial settings.

Don’t forget the dividends

Woodside shares are also attractive for their juicy, fully franked dividends.

Despite coming down over the past 12 months, at the current share price, Woodside trades on a fully franked trailing yield of 7.8%.

But if oil and gas prices tick higher from here, as I expect, the dividends are likely to run higher again, too.

And investors buying at today’s much reduced Woodside share price would then be realising an even higher yield than 7.8%.

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