The pros and cons of buying Woodside shares right now

The energy stock is an interesting investment proposition.

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Woodside Energy Group Ltd (ASX: WDS) shares have been on a downward trend over the last year, falling more than 20%, as we can see in the chart below.

After its sizeable decline in the past 12 months, investors may wonder if this is a buying opportunity.

There are some compelling reasons to buy Woodside shares, but also other reasons for avoiding it. Let's look at both sides of the investment equation.

The positives

A lower Woodside share price means a more appealing valuation, as shown by its lower price/earnings (P/E) ratio. It's possible Woodside shares could still go cheaper, but the 27% drop from September 2023 is substantial.

Broker UBS has forecast Woodside could make earnings per share (EPS) of $1.23, resulting in a forward P/E ratio of 15. This is materially lower than the valuation when the Woodside share price was still above $38, compared to approximately $28 today.

A cheaper Woodside share price also leads to a larger dividend yield for new investors. UBS suggests the ASX energy share could pay an annual dividend per share of US 98 cents. That translates into a possible grossed-up dividend yield of 7.6%. The dividend return could generate an essential part of the overall shareholder returns in the medium term.

The third positive I'll point to is the possibility of growing energy demand. Data centres could drive significant demand growth for greener energy, such as hydrogen, which could help the company find customers for its hydrogen projects.

Finally, the Australian Federal Government recently announced that gas would remain part of Australia's energy plans at least until 2050. The government had this to say:

Reliable gas supply will gradually and inevitably support a shift towards higher-value and non-substitutable gas uses. Households will continue to have a choice over how their energy needs are met.

Australia is, and will remain, a reliable trading partner for energy, including Liquefied Natural Gas (LNG) and low emission gases.

Negatives about Woodside shares

An integral negative for me is the company's profit is closely linked to energy prices, but it has little control over oil or gas prices. It's a price-taker rather than a price-maker. Price-takers find it challenging to deliver consistently growing profit, so we can often see the Woodside share price bounce around rather than steadily rising over time.

Consequently, UBS thinks EPS could be higher in FY24 than in FY26 and FY28. Forecasts are just educated guesses, of course — energy prices could be weaker or stronger. However, if EPS doesn't grow much compared to the estimate for FY24, I can't see the Woodside share price delivering too much in terms of capital growth.

UBS also points out that one of Woodside's projects, Sangomar, has "complicated" geology. The broker is cautious because the ASX energy share has not provided disclosure on its well performance.

The broker also notes there's an "increased risk" that the fiscal regime under the Sangomar Production Sharing Contract may be renegotiated to increase the government's take following Senegal's change in government.

Foolish takeaway

Now may be an opportune time to examine the business after its recent decline.

However, because of the uncertainty relating to commodity pricing, I don't think there's a significant upside for the Woodside share price. I'd rather focus on other ASX shares with a more foreseeable and consistent growth outlook.

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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