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Citi has revised its rating for Woodside (ASX:WDS) from Neutral, highlighting concerns over declining oil prices, unexpected asset depreciation, and potential mergers and acquisitions (M&A) activity.
Oil Price Forecast: Citi anticipates oil prices will fall to $60 per barrel by 2025, driven by slowing demand, strong non-OPEC supply growth, and ample global production capacity. This bearish forecast is expected to negatively impact Woodside’s earnings, given the lower revenue starting from a reduced base against higher fixed expenses.
Asset Depreciation: Recent adjustments have increased the depreciable asset base for the Sangomar project significantly. The updated figures show higher depreciation costs for the years 2024, 2025, and 2026, reflecting a revision of past forecasts which had been overly optimistic.
M&A Performance: Woodside has faced challenges in realizing the full value of recent acquisitions. Issues include substantial write-downs on assets acquired in 2015, potential negative net present value (NPV) risks for Sangomar, and underperformance of other acquisitions. These include downgrades on BHP-P assets, an unsuccessful Wildling appraisal, and impairments related to Shenzi. The report also highlights dissatisfaction with Driftwood and Beaumont, alongside high exploration costs and capital allocation concerns.
Free Cash Flow: While free cash flow yields are projected to improve significantly in the latter half of this decade, skepticism remains regarding the achievability of these high yields in the near term. The report notes that significant improvements in free cash flow are expected once Scarborough and Driftwood projects are operational, but doubts persist about the short-term outlook.
M&A and Cash Flow Risks: Comments from CEO Meg O'Neil suggest potential M&A activity in upstream and blue ammonia sectors, which could affect cash flows. Citi anticipates that further acquisitions may be necessary to address current limitations in upstream diversification and LNG portfolio expansion.
Gearing and Dividends: Under conservative oil price assumptions, Citi projects peak gearing of 19% by 2026, which may lead to strategic financial adjustments such as dividend reductions or equity raises to support capital expenditures.
Citi’s report indicates that for a more favorable outlook on Woodside, key conditions such as stabilizing dividends and completing M&A activities would need to be met. However, given the current conditions and the approximate 32% drop in Woodside’s shares over the past year, no immediate positive catalyst is evident.
