Woodside Energy Group Ltd (ASX: WDS) shares have dipped over 16% since 15 September 2023. Could this be an opportunity to buy the dip? One fund manager thinks it's an undervalued ASX energy share.
The fund manager in question is Philipp Hofflin, a portfolio manager from Lazard Asset Management who manages the Australian equity fund.
Hofflin was recently talking to the Australian Financial Review about where he sees value. He said that Woodside (and Santos Ltd (ASX: STO)) are being undervalued by the market.
Why are Woodside shares undervalued?
The fund manager pointed out that Woodside shares and Santos shares have performed "very well" in the last three years. While they're not as cheap as they used to be, Hofflin suggests they still offer "a great opportunity".
The companies don't trade on very high price/earnings (P/E) ratios. Woodside could generate more operating cash flow in the next five years than its entire market capitalisation.
This cash flow is enabling the business to invest a large amount into different projects to "meet rising Asian demand for gas". He also pointed to the large dividend yield that the company is paying, which is fully franked.
According to projections on Commsec, the ASX energy share is projected to pay an annual dividend per share of $2.25 in FY24. That would be a cash yield of 6.25% and a grossed-up dividend yield of 9%.
The fund manager noted that "it all depends on energy prices", but it has a cash flow breakeven cost of only about US$15 per barrel of oil equivalent and "very little net debt, so it is a robust cash generator even in a downturn."
Global investment in both new renewable and old sources of energy "remains too low" according to the fund manager, but "the risks for energy prices are very much skewed to the upside." In other words, current conditions are more likely to be positive for Woodside shares and energy prices than negative.
Forward P/E ratio
The company's 2023 financial year isn't over yet because it follows the calendar year, so we'll look at both FY23 and FY24.
At the current Woodside share price, it's priced at under 13 times FY23's estimated earnings and just over 13 times FY24's estimated earnings.
