Woodside Energy Faces Earnings Decline Amid Strategic Uncertainties: What Investors Need to Know
By Archishma Iyer and Rajasik Mukherjee
(Multibagger) - Woodside Energy (OTC: WDS), Australia's leading independent gas producer, is bracing for a decline in interim earnings. Scheduled to report its first-half results before the market opens on August 27, the Perth-based company is under the spotlight for its deal-making strategies following the collapse of a $52 billion merger with Santos (ASX: STO).
Earnings Outlook and Market Focus
Woodside is projected to report an underlying net profit after tax of $1.11 billion for the six months ending June, per a Visible Alpha consensus cited by Jarden. This marks a significant drop from the $1.90 billion reported in the same period last year.
"Woodside's portfolio is ex-growth and very highly concentrated in the yet-to-be-started Scarborough field. This is problematic and necessitates M&A, in our view," analysts from Citi stated in a research note earlier this month.
Strategic Moves and Market Sentiment
Despite securing primary environmental approvals for its $12.5 billion Scarborough gas project in Western Australia, which is expected to serve as a growth catalyst with its first LNG cargo likely in 2026, analysts remain skeptical about Woodside's future M&A plans. The energy firm has recently engaged in billion-dollar deals, including the acquisition of LNG developer Tellurian (NYSE: TELL).
"The prevailing share price... along with our cautious stance on oil into 2025 and the uncertainty on the dividend and future M&A, we can’t yet argue value," Citi analysts noted.
Financial Metrics and Market Comparison
Woodside traded at a Price-to-Earnings (P/E) ratio of 20.2 on Monday, based on the last 12 months of earnings, compared to the broader Australian market's P/E of 17.9, according to LSEG data. Lower demand from top consumer China and geopolitical tensions in the Middle East have contributed to a sharp decline in prices from their 2022 highs.
Dividend and Cost Concerns
Analysts at Jarden have adjusted Woodside's dividend payout ratio estimate down to 65% from 80%, attributing the reduction to costs associated with recent acquisitions. This adjustment comes as investors closely monitor the company's financial health and strategic direction.
Santos as a Potential Takeover Target
Santos, Australia's second-largest independent gas producer, has reported a larger-than-expected drop in half-year profit to $654 million, citing lower realized prices and higher costs. This underperformance has turned Santos into a potential takeover target after failing to agree on a merger valuation with Woodside.
Santos' Chairman, Kevin Gallagher, has expressed a willingness to sell certain projects or the entire $16.3 billion company, acknowledging its struggle with a declining share price.
Breaking It Down: What This Means for You
Let's simplify this to the core points:
- Earnings Decline: Woodside is expected to report lower earnings compared to last year, which might make investors cautious.
- Strategic Moves: The company's deal-making strategies are under scrutiny, especially after a failed $52 billion merger with Santos.
- Key Projects: Woodside's $12.5 billion Scarborough gas project is seen as a future growth driver, but its potential won't be realized until 2026.
- Dividend and Costs: Due to recent acquisitions, Woodside's dividend payout ratio is expected to decrease, affecting income for shareholders.
- Market Comparisons: Woodside's financial metrics, like the P/E ratio, are higher than the broader market, indicating it might be overvalued.
- Santos' Position: Santos is struggling financially and could be sold off, making it a point of interest for investors looking at potential market shifts.
How This Affects You
If you're an investor or considering investing in Woodside or Santos, understanding these dynamics is crucial. Lower earnings and high costs might impact returns. Strategic uncertainties could mean potential volatility in stock prices. Always consider consulting with financial advisors to align these insights with your investment strategy.