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Amid a turbulent year for the energy sector, especially with falling oil prices, many investors are reevaluating their holdings in Australian energy stocks like Woodside Energy Group Ltd (ASX:WDS). Woodside's shares have been on a sharp decline in 2024, dropping over 20%. While some may still be clinging to their positions, recent actions by ASX fund manager Blackmore Capital suggest a different approach.
In a recent portfolio update, Blackmore Capital announced its exit from Woodside shares, not solely due to fluctuating oil prices but rather driven by deeper concerns over the company’s recent strategic decisions. According to the fund manager, it is Woodside’s acquisitions and capital allocation strategy that prompted the decision to sell. Specifically, Blackmore pointed to the company's investments in the Driftwood LNG project and the Clean Ammonia Project as troubling.
While these acquisitions might diversify Woodside’s portfolio, Blackmore views them as more dilutive than accretive in terms of return on capital employed (ROCE). For instance, the Driftwood LNG project is expected to generate an internal rate of return (IRR) of only 12%, and it will take years before it begins contributing to cash flow. These long-term prospects, combined with the high capital expenditures involved, do not align with Blackmore’s investment goals.
Adding to the concerns, Blackmore notes Woodside’s limited production growth outlook over the next five years. With guidance for 2024 set at 189-195 million barrels of oil equivalent (MMboe), the fund manager sees minimal expansion from the company’s existing assets. Blackmore also highlighted geopolitical risks related to major projects like Scarborough and Sangomar, which are still in their ramp-up phases.
In addition to these operational challenges, Woodside's substantial debt, high capital expenditure demands, and a lofty dividend payout ratio were cited as further reasons for Blackmore's decision to sell.
Having exited Woodside, Blackmore Capital has pivoted its focus to other ASX-listed stocks. In place of its Woodside shares, the fund manager has invested in three companies: Goodman Group (ASX:GMG), Origin Energy Ltd (ASX:ORG), and Macquarie Technology Group Ltd (ASX:MAQ).
Goodman Group, a real estate investment trust (REIT), was one of the first names added to the portfolio. Blackmore was encouraged by Goodman’s full-year results for FY2024 and decided to increase its position following a recent pullback in share price. The fund manager is particularly optimistic about Goodman’s exposure to data centers, viewing it as a key driver for sustained long-term growth.
Next, Blackmore identified Origin Energy as another strong investment. The decision to increase its stake was largely based on Origin’s impressive FY2024 earnings report, which saw net profits rise by 58%. The fund manager believes Origin is well-positioned to benefit from the ongoing structural shift towards electrification and decarbonization in Australia’s National Electricity Market (NEM). Additionally, Origin's strong balance sheet and robust cash flow profile made it an attractive alternative to Woodside.
Finally, Blackmore is “topping up” its stake in Macquarie Technology Group. The fund manager seized the opportunity to invest more heavily in the tech company following a recent decline in its share price. Macquarie, which has enjoyed 10 consecutive years of EBITDA growth, is seen as a major benefactor of the growing demand for cloud-based services, and Blackmore expects continued success in this area.
