Oil and gas giant Woodside Petroleum Limited (ASX: WPL) has emerged as a key defensive stock for many investors in recent weeks, thanks to its strong dividend yield and balance sheet.
Woodside’s dividend yield of 3.6%, doesn’t look too bad against the dividend heavyweights, Australia and New Zealand Banking Group (ASX: ANZ) on 5.8%, Commonwealth Bank of Australia (ASX: CBA) on 6.2%, National Australia Bank Ltd. (ASX: NAB) on 7.4%, Westpac Banking Corp (ASX: WBC) on 6.6% and Telstra Corporation Ltd (ASX:TLS) on 8.3%.
But is a solid yield and balance sheet strength enough to say the shares are a buy?
Market experts have differing views on the topic following the company’s investor day on Wednesday.
While broker Credit Suisse acknowledges that Woodside is the most defensive name in the oil and gas sector thanks to its strong balance sheet and around a 4-5% dividend yield from CY2018-2020E, that’s not enough for the broker to be positive about the stock.
It has a “Sell” recommendation on Woodside and says it continues to see a risk to consensus earnings on repricing for the company’s Pluto offshore LNG production facility and generally lower liquefied natural gas (LNG) pricing longer term.
Another reason for the cautious stance is the belief Woodside is focusing too much on the schedule for its Scarborough gas assets – which Woodside acquired a stake in from Exxon Mobil Corporation (NYSE: XOM) earlier this year.
“We are cautious that WPL is focusing too much on schedule for Scarborough. The risk is a suboptimal design or poor project execution. WPL’s LNG market outlook isn’t too dissimilar from our own and we agree project sanctions need to occur in earnest to satisfy future demand,” the broker said in a report.
At the investor day, Woodside announced a significant expansion of its Pluto processing facility and brought forward estimations of first gas production at the Scarborough site and increased expected expenditure. The company now estimates spending $US11 billion on the Scarborough development, up from a previous estimate of between $US8.5 billion and $US9.7 billion.
UBS, on the other hand, welcomed the Scarborough update, kept its “Buy” rating on the stock and upped its target price to $37.50 from $34.70.
“In our view the market is underestimating WPL’s willingness and capacity to execute on Scarborough (which is set to soundly beat PNG LNG expansion to market, in our view) and is overly pessimistic on Pluto LNG contract repricing,” it said in a report.
It added that Woodside’s desire to bring forward Scarborough gas production should not only lock in development contracts at the low point of the cycle but also capture the expected global LNG supply shortfall emerging from 2022.
Macquarie, meanwhile, said while the message about fast-tracking of increased volumes at Scarborough was positive, the investor day offered few surprises.
It retained its “Neutral” recommendation on the stock.
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Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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