Woodside worth a hold
Recommendation
Back in We need to talk about Woodside (Sell - $42.05), we recommended selling one of the best quality energy stocks on the market. We certainly didn't see the collapse in oil prices coming: our concern was that Woodside was not adequately investing in its business, allowing reserves to dwindle without replacement. In time, we argued, management would have to replace reserves or face a slow, bleeding death.
The stock price is down a little since then – about 13% – but circumstances have changed enormously. The oil price collapse has shocked the industry and caused a rush of asset sales and development freezes. Woodside, with a cash rich balance sheet, now has plenty of options to buy distressed assets at bargain prices to correct its reserves decline. Management is doing just that, having announced $4.6bn worth of purchases from Apache, including a stake in the Wheatsone LNG project in Australia and some Canadian oil and gas assets.
These are excellent purchases at attractive prices – the Wheatstone purchase was bought at a discount to sunk costs – and remedy our prime concern with the company. With lower prices and new projects in place, there is no longer a case for selling Woodside and we will investigate the buy case if prices weaken further. For now, we're upgrading to HOLD.