Is the Woodside share price at a stretched valuation right now?

Some are still optimistic on the energy giant, despite softer oil prices.

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The Woodside Energy Group Ltd (ASX: WDS) share price has drifted around 10% lower this year to date, continuing its slide from last year and hitting 52-week lows earlier this month.

Meanwhile, the broader S&P/ASX 200 Energy Index (ASX: XEJ) is down just 1.8% so far this year.

But, as Warren Buffett says, "price is what you pay – value is what you get".

So, is the Woodside share price attractively valued, or not?

What impacts Woodside's valuation?

Woodside produces oil and gas. That means it does not have the luxury of setting its prices. Instead, it must accept the current market price for oil and gas. It is a "price taker".

Brent crude oil currently trades at around US$83 per barrel, down from the highs above $90 per barrel seen early last month.

Oil prices have cooled since April on the prospect of even higher interest rates, "which could dampen growth and hit fuel demand in the world's top oil consumer [the USA]", per Trading Economics.

Analysts at Morgans, however, don't see this as a headwind for the Woodside share price. The broker is bullish on the oil and gas giant's stock and sees the decline in oil prices as "moderating".

If oil prices do, in fact, remain stable, the broker sees the current Woodside share price "as a good time to add" and targets $36 per share for the energy player in the next 12 months.

Should this target price materialise, a $10,000 investment in Woodside shares today would be valued at around $12,700 – a 27% return, not including dividends.

Is the Woodside share price overvalued?

The company's shares currently sell at a price-to-earnings (P/E) ratio of 21.6 times. That means, investors are paying $21.60 for every $1 of the company's profits.

For this, Morgans expects the company to pay dividends of $1.25 per share in FY 2024 – a forward dividend yield of around 4.5% as I write.

Meanwhile, competitors Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) trade at P/E multiples of around 12 times and 11 times respectively.

Okay, so we know investors are paying a higher price for Woodside shares than their peers relative to the earnings of the respective businesses.

Why would this be so? Does it mean Woodside is overvalued?

Morgans doesn't think so. The broker says Woodside has "a healthy balance sheet and healthy dividend profile" as two factors in the value equation.

Its price target of $36 per share implies a P/E multiple of around 41 times Woodside's last reported earnings per share of $0.87.

The broker ultimately believes the Woodside share price is undervalued. Time will tell.

Motley Fool contributor Zach Bristow 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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