The share price of Woodside Petroleum Limited (ASX: WPL) looks set to finish the year relatively flat after swinging wildly between losses and gains. The stock seems to be going nowhere fast but 2018 could be a very different story for the energy giant, according to Morgan Stanley.
The broker is expecting some solid gains for Woodside and is urging investors be overweight on the stock for the coming year.
This is good news for shareholders who had to endure a volatile ride in 2017 with the stock dipping 0.6% in lunch time trade to $32.10. This means the stock is up only around 3% since January when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is ahead by twice that amount.
It has been a bit of a mixed bag of results for the sector. While Oil Search Limited (ASX: OSH) is up 2.3%, Santos Ltd (ASX: STO) jumped nearly 26% and Origin Energy Ltd (ASX: ORG) surged around 40%.
Coming back to Woodside, Morgan Stanley gives four reasons for its bullish call. The first reason is its outlook on production, earnings and dividend growth for Woodside over the next two years.
While production growth doesn't always equate to value, the broker says Woodside's low cost assets will help drive a circa 15% growth in the company's earnings next year – and this is based on the broker's assumption that the price for oil will fall to US$56 a barrel from the current spot price of US$63 a barrel.
If the spot price held, Woodside's earnings will increase by 37% instead!
Higher earnings will likely mean higher dividends as management pays out around 80% of profits as dividends (unless it makes an acquisition). This suggests that Woodside is trading on a yield over 4% for FY18.
The second reason is the pick-up in global industry interest in Senegal. That is a positive for Woodside due to its development project in that country. Now that Shell has sold its stake in Woodside, the company could be an attractive takeover target if we see an increase in mega M&A deals in 2018 as I am expecting.
The third reason Morgan Stanley is bullish on Woodside is early signs of a recovery in liquefied natural gas (LNG) markets. Spot LNG prices are rising and have defied bearish expert forecasts. If this trend continues, that will put Woodside in a prime position to be re-rated by the market given the number of potential brownfield LNG developments it has in its portfolio.
Finally, there is another re-rating opportunity for Woodside around its contractual repricing of gas from the company's Pluto project. The market is worried that Woodside will receive a low price when customers renegotiate supply contracts in 2019 given the recent string of weak LNG contract prices in India.
However, Morgan Stanley thinks the risks are overplayed given that LNG prices are starting to recover. Also, Pluto's customers are in Japan and not India, and the broker notes that repricing in Japan tends to be benchmarked to that country.
The broker has a price target of $35.55 on the stock.
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