This may be as good as it gets for the Woodside Petroleum Limited (ASX: WPL) share price, which has outperformed the broader market this year.
The Woodside share price has rallied 21% since January compared to the 18% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
The stock has also outperformed most of its large cap peers over the period including the Oil Search Limited (ASX: OSH) share price and the Origin Energy Ltd (ASX: ORG) share price.
LNG projects at risk
But its golden run may be drawing to a close after JP Morgan downgraded the stock to "underweight" from "neutral" and warned that its Scarborough and Browse projects could be at risk.
"Continued weakness in LNG [liquified natural gas] markets has left Woodside facing a number of issues with its development projects," said the broker.
"We believe the marginal returns from these assets is hampering the company's ability to convince JV [joint venture] partners to proceed and this is likely causing delays to the pre-FID schedule. The risk is that one or both are indefinitely shelved, which likely means that trains at the Karratha Gas Plant will need to be shut down."
The two projects have a low internal rate of return (IRR). If Woodside pushes ahead with the projects as its CEO Peter Coleman had suggested it would despite weak LNG prices, Scarborough and Browse will only generate low double-digit returns, according to JP Morgan. That hardly compensates the JV partners for the construction and development risks.
High yields may not be enough
"We estimate the stock trades at a P/NPV of 1.04x compared to the rest of our energy sector coverage (Oil Search, Santos, Origin, Beach and Senex) at 0.90x. We believe this is in part due to its 5.5-6.0% dividend yield," said the broker.
"While this could keep supporting the stock price, we would note that Scarborough has already been funded through an equity raising and there is the potential for further capital needed to support Browse and other growth projects."
JP Morgan also lowered its price target on Woodside to $33.85 from $34.60 per share.
I am underweight on energy stocks as I think it's too hard to try to forecast the crude price (LNG contracts are often benchmarked against the Brent oil price), which is prone to geo-political risks.
I prefer to invest in oil and gas engineering services group Worleyparsons Limited (ASX: WOR) as its earnings aren't as directly impacted by the fluctuating crude price.
But those who can't stomach volatile commodity prices may want to look elsewhere for buy ideas. The experts at the Motley Fool have a few suggestions on stocks that are well placed to outperform in FY20.
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