Woodside Energy Group (Woodside, the Group, ASX: WDS) is a global energy company founded in Australia in 1954. It initiated Australia’s LNG industry as operator of the North West Shelf Project where it shipped its first LNG cargo to Japan in 1989. In 2022, Woodside merged with BHP’s petroleum business to become the largest energy company on the ASX.
Positioned for the energy transition
The precise pathway of the global energy transition is uncertain, however demand for reliable, affordable, and increasingly lower-carbon energy will continue to grow. Liquid Natural Gas (LNG) is a flexible, reliable and lower carbon solution, making it highly compatible with renewable energy sources such as solar and wind power.
Accordingly, LNG is an energy source that meets future demand which is increasingly shaped by decarbonisation goals. This implies there is a clear and sustained opportunity for coal-to-gas switching as the world navigates the energy transition.
The evidence points to Liquid Natural Gas (LNG) as an affordable means to reduce global carbon emissions and as a reliable source of energy to underpin modern living standards. When used to generate electricity, gas typically produces half the lifecycle emissions of coal and can also provide consistency and reliability for electricity grids that are powered by renewables and batteries.
In the US over the past two years, switching from coal to gas accounted for two-thirds of the emissions reduction in electricity generation. Today global coal consumption is approximately eight times higher than global LNG, so if just 12 percent of coal-fired power generation was converted to LNG today, it would double the current global LNG market. This suggests that LNG is likely to remain a critical global energy source for decades to come as the world seeks to lower carbon emissions, especially In the Asia Pacific region where coal consumption continues to rise. The Asia Pacific region currently accounts for more than 80 percent of global coal use.
The Asia Pacific region is already a key market for Woodside and with the region’s significant dependence on coal, the shift towards gas to support decarbonisation is clearly a long-term demand source for Woodside’s LNG exports.
Geographically advantaged
Woodside is geographically advantaged in meeting growing LNG demand with exposure to both the Atlantic and Pacific basins. The Group already has a strong existing Australian and Asia Pacific LNG position and has plans to increase its presence in the Atlantic basin through the recently announced acquisition of Tellurian and its Driftwood LNG project. The presence in both basins creates an opportunity for value optimisation and price arbitrage between the basins.
As well as the strategic move to multiple supply sources, Woodside has robust logistical infrastructure including shipping, with seven modern LNG ships on long-term time charter.
The availability of these ships provides the capacity to capture value from market volatility by diverting ships, swapping cargo sizes, and having greater control of supply to deliver LNG when and where it is needed. This is particularly valuable in times of geopolitical uncertainty and price volatility.
Woodside is commissioning four new LNG vessels to be delivered between now and 2026. These new vessels come with the latest fuel-saving technologies and will reduce unit operating costs and further reduce carbon emissions from shipping operations.
Balance sheet strength supports dividends and share buy-backs
Despite low average realised energy prices for the half-year to 30 June 2024, Woodside continues to perform well.
The Group has a stable investment-grade credit rating that enables access to debt at a competitive rate and it maintains a conservative gearing ratio within the range of 10 to 20 percent through the investment cycle. Gearing on 30 June 2024 was 13.3 percent. This supports a dividend policy to pay a minimum of 50 percent of underlying profit and a target range of 50 percent to 80 percent. Over the last decade, Woodside has consistently paid at the top end of this range.
Based on the interim fully franked dividend of $1.02 per share, the annualised dividend yield is just over 7 percent. This dividend represents an 80 percent payout ratio. Directors have stated that their capital management framework aims to balance the Group’s capital commitments, target credit metrics, and the oil pricing environment with the payment of special dividends and importantly, share buybacks.
Looking ahead
The world needs energy that is reliable, accessible and affordable. LNG is flexible, can be transported to any LNG terminal in the world, and is a clean energy source which is cost-competitive with renewable energy sources.
The Woodside share price has underperformed Brent oil in 2024, however as a top-10 global energy business with a strong balance sheet and a clear growth profile in terms of supply and demand, the current share price may prove to be an attractive entry point for patient investors.
