Woodside shares or Whitehaven? What’s the best ASX 200 value play?

Woodside is producing oil at a cost of roughly 10% of the current global spot price.

| More on:
Value spelt out with a magnifying glass.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Woodside Energy Group Ltd (ASX: WDS) shares or Whitehaven Coal Ltd (ASX: WHC) shares, which is the best value opportunity?

We’ll get to that in a tick.

First, a spot of recent history.

Both of the S&P/ASX 200 Index (ASX: XJO) energy companies have been making hay over the past 18 months, as energy prices have rocketed from their post pandemic lows.

Here’s what we mean.

In October 2020, Brent crude oil was trading right around US$40 per barrel. As the world began to reopen over the following months, growing demand met with sticky supply following years of shortcomings in new exploration and project development.

Add in energy-rich Russia’s invasion of Ukraine, and today that same barrel of Brent crude is trading for just over US$121, while coal prices are fetching near all-time highs.

How have Whitehaven and Woodside shares performed?

Since 2 October 2020, the ASX 200 has gained a very healthy 25%.

In line with rocketing energy prices, the S&P/ASX 200 Energy Index (ASX: XEJ) has almost tripled that return, up 73%.

Woodside shares have outpaced the energy index benchmark, gaining 89% over that same period. At the current price, Woodside shares pay a 5.9% trailing dividend yield, fully franked. The energy giant now has market cap of $60.4 billion following its recent successful merger with the oil and gas assets of BHP Group Ltd (ASX: BHP).

The Whitehaven share price has stormed ahead even faster, up a whopping 415% since 2 October 2020. At the current price, Whitehaven has a market cap of $5.5 billion and pays a 1.5% trailing dividend yield, unfranked.

Following that strong run, which is the best value opportunity?

Getting back to our headline question, after a tremendous 18 months, do Woodside shares or Whitehaven shares present the better value play?

For some insight into that question, we defer to Philipp Hofflin, portfolio manager at Lazard Asset Management.

Hofflin saw that opportunity in the beaten down ASX energy shares in October 2020 and began adding them to Lazard’s holdings.

Speaking to Livewire, Hofflin explained, “What attracted us to the sector 18 months ago was a combination of the very low prices and the fact that there was just no CAPEX around the world in energy.”

Modern renewables “are only at 6% of global supply, and they aren’t able to fill the hole that is left by the much larger declines on the fossil fuel side at the moment,” he said.

The natural depletion rate for oil and gas is around 5% to 7%. “So, if you don’t invest, then you don’t have replacement projects for the ones that run off and your supply actually starts to fall.”

With that thesis in mind, Hofflin was comfortable buying Whitehaven and Woodside shares 18 months ago when many investors wouldn’t touch them.

The case for Whitehaven Coal

Explaining why Whitehaven Coal still remains an attractive play, although Lazard has sold off a large part of its holdings, Hofflin said:

In the case of Whitehaven, the current ex-Newcastle high CV thermal coal price is over $400 US. At those sorts of prices, Whitehaven has a free cash flow that is about equivalent to its market cap, over 12 months. So, free cash flow is at a level of 100%.

Looking ahead, however, he cautions, “At the same time, we know that these extraordinary prices are not going to last… The risk-return profile for something like Whitehaven isn’t as good as it was” 18 months ago.

“On one hand, we have the fact that commodity prices will fall, and on the other hand, there will be enormous cash flows.”

Woodside shares come out on top with fortress balance sheet

For the best value play Woodside shares come out on top.

“The numbers aren’t perhaps quite as dramatic,” Hofflin said. “But Woodside too is on a 33% spot free cash flow yield today.”

Hofflin continued:

The astonishing thing about Woodside is that you can buy it today at 20% less than it was pre-COVID. Yet it has done a deal with BHP Petroleum, that is currently delivering phenomenal earnings. The Asian gas price is off at $30 for a million British thermal units – it’s an extraordinary price. The cash flow is enormous. They have a fortress balance sheet because they did this deal entirely with equity.

Comparing Woodside shares today with Whitehaven’s, Hofflin said, “Whitehaven is a risky stock… On the other hand, Woodside, which has a sort of breakeven cost of production of just a bit over $10 a barrel, in a world where the oil price is $110, it’s a pretty safe value opportunity.”

Happy investing!

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.

More on Value Investing

A girl is handed an oversized ice cream cone with lots of different flavours.
Opinions

Looking for value: The ASX shares this fundie is holding amid rising inflation

Here are some investments that could be well suited to the current climate.

Read more »

Rich man posing with money bags, gold ingots and dollar bills and sitting on table
Value Investing

3 ASX 200 shares swimming in billions, besides banks and miners

These three companies are loaded with cash...

Read more »

A group of five people dressed in black business suits scrabble in a flurry of banknotes that are whirling around them, some in the air, others on the ground as some of them bend to pick up the money.
Value Investing

Free cash flow: Here are 3 ASX All Ords shares that have it in spades

The lifeblood of a company is back in focus...

Read more »

two young boys dressed in business suits and wearing spectacles look at each other in rapture with wide open mouths and holding large fans of banknotes with other banknotes, coins and a piggybank on the table in front of them and a bag of cash at the side.
Value Investing

3 ASX shares that could cash in on higher interest rates

Money in the bank is looking even more appealing for these ASX shares...

Read more »

A business man in soft-focus holds two fingers in the air in the foreground of the shot as he stands smiling in the background against a clear sky.
Value Investing

Gambling & explosives: fund reveals 2 ASX shares to buy right now

Inflation and interest rate rises mean businesses that make positive earnings now are now more valued than those with future…

Read more »

a woman sits in comtemplation with superimposed images of piles of gold coins, graphs and star-like lights above her head as though she is thinking about investment options.
Value Investing

3 ASX 200 value shares to buy for higher inflation: fundie

One fund manager provides three ways to potentially benefit from rising rates...

Read more »

A young woman sits on her lounge looking pleasantly surprised at what she's seeing on her laptop screen as she reads about the South32 share price
Value Investing

While everyone was focused on growth shares, these ASX value shares have been quietly but significantly gaining over the last 10 years

Looking for value shares?

Read more »

Deterra share price royalties top asx shares represented by investor kissing piggy bank
Value Investing

These are some of the top performing ASX 200 value shares of the past year

What value is in a value share?

Read more »