Could the bountiful dividends from Woodside shares be at risk?

There is danger lurking in the future for Woodside, according to this expert.

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Key points

  • Woodside could suffer from impacts of a change to the petroleum resources rent tax
  • This could hurt the net profit and the potential future dividends, according to Citi
  • The Woodside share price could fall around 10%, according to the broker

Woodside Energy Group Ltd (ASX: WDS) shares could come under increasing pressure if the experts at broker outfit Citi are correct.

As an ASX energy share giant, the company is heavily affected by what energy prices are doing. But, there are also other risks to consider, such as the work on huge projects being on time and on budget. Governments can also change the operating landscape. With that in mind, investors need to be aware of what Citi thinks could happen.

Lower profit possible

According to reporting by The Australian, Citi has a price target of $30 on the company, which implies a possible fall of around 10%.

The problem, according to analyst James Bryne, is the potential change to the petroleum resources rent tax (PRRT).

As recently reported:

The PRRT allows concessions on expenses relating to exploring and developing gas fields. Under the current system, these can be carried forward and deducted as tax credits against future liabilities. But the Greens want the government to eliminate $284 billion of accumulated credits that enable gas companies to reduce their tax liability.

The suggestion is to remove all of these tax credits, which would mean gas companies start paying from 1 July, and for the government to apply a 10% royalty to all offshore projects subject to the tax.

Citi has suggested that change could mean that the market's expectations for Woodside's earnings per share (EPS) could reduce by 10% to 15%, hurting the underlying value of the business by 5% to 10%.

Despite that, Citi analyst Bryne increased his expectations for 2023 net profit after tax (NPAT) because of the recent strong result, though somewhat offset by the "moderated ramp-up profile for Mad Dog production".

Citi also increased the 2024 and 2025 net profit forecasts slightly thanks to "higher trading volumes".

Is this going to hurt Woodside dividends?

The Australian also reported that Citi believes a fall in the net profit could lead to a reduction of the potential dividends as well. This could also hurt the Woodside share price if investors aren't getting the dividend income they were expecting. Bryne said:

Over the coming years, we expect a theme of ASX Energy to be a redirection of capital budgets away from Australia, by both organic and inorganic means.

It seems understandable that if Woodside sticks to a certain dividend payout ratio in percentage terms, then a fall in profit would mean lower dividends as well.

However, not every broker is as pessimistic as Citi about the company's prospects. The broker JPMorgan recently raised its rating to neutral, with a price target of $33.85, which is slightly higher than where it is today.

Woodside share price snapshot

Over the past year, the Woodside share price has risen by around 10%.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

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