We’ll get to that in a tick.
First, a spot of recent history.
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.”
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.”