Australian hydrocarbon producer Woodside (ASX: WDS) posted an 8% sequential decline in first-quarter production to 45 million barrels of oil equivalent, or mmboe, with Western Australian output affected by Cyclone Narelle. Revenue rose 7% to USD 3.3 billion on an 11% increase in the average commodity price.

Why it matters: We reduce our 2026 underlying EPS forecast by 15% to USD 1.77. This reflects some weakening in the Brent futures curve since our last note. That’s despite first-quarter revenue coming in higher than we’d expected on better price achievement. Sales volumes were close to expectations.

  • Woodside retains all prior 2026 guidance, including volumes of 172 mmboe-186 mmboe. We reduce to 182 mmboe, from a high-end 186 mmboe, given the weather-hit first quarter. We estimate average first-quarter price achievement of USD 66 per boe will be bettered by about 9% in the second.
  • Key development projects remain on budget and schedule, with Scarborough/Pluto T2 96% complete and on track for first LNG cargoes in the fourth quarter of 2026. We expect group production to rise by 9% by 2027, or to about 215 mmboe per year, chiefly on Scarborough/Pluto T2.

The bottom line: Our $43.80 fair value estimate for no-moat Woodside stands. At around $33, we think the market is overly bearish. The energy transition casts a pall over hydrocarbon demand. But significant investment is required in most demand scenarios to backfill natural decline.

  • We expect oil demand to stay resilient with strong demand from heavy transport and petrochemical segments, and a potential supply gap in support of pricing. And economic expansion in emerging Asian markets is expected to support healthy LNG demand growth.

Between the lines: The impact of the Strait of Hormuz closure and higher energy prices is expected to be evidenced further in coming quarters, given that prices only began rising late in the first quarter and there is about a one-quarter lag for LNG contracts referenced to Brent crude.

Woodside volumes affected by weather, but pricing improves

As Australia’s premier oil player, Woodside Petroleum’s operations encompass liquid natural gas, natural gas, condensate and crude oil. However, LNG interests in the North West Shelf Joint Venture, or NWS/JV, and Pluto offshore Western Australia are the mainstay, and the low-cost advantage of these assets form the foundation for Woodside. Future LNG development, particularly relating to the Pluto project, encompasses a material percentage of this company’s hydrocarbon production volumes.

Woodside is unique among Australian energy companies in that it has successfully managed the development of LNG projects for more than 40 years—unparalleled domestic experience at a complicated and expensive task. Adding to Woodside’s competitive advantages are the long-term 20-year off-take agreements with the who’s who of Asia’s blue chip energy utilities, such as Tokyo Electric, Kansai Electric, Chubu Electric, and Osaka Gas. These help ensure sufficient project financing during development and bring stability to Woodside’s cash flows once projects are complete. Woodside also enjoys first-mover advantages. The NWS/JV has invested more than AUD 27 billion since the 1980s, building infrastructure at a fraction of the cost of today’s developments. With substantial growth aspirations, Woodside still has considerable expenditure ahead of it, but the existing infrastructure footprint is regardless a huge head start, from both an expenditure and a regulatory-approval perspective.

Woodside’s development pipeline is deep, enabling it to leverage the tried and trusted project-delivery platform as a template for other world-class gas accumulations off the north-west coast of Australia. Woodside is well suited to the development challenge. With extensive experience, it remains a stand-out energy investment at the right price. Gas is the fastest growing primary energy market behind coal, and the seaborne-traded LNG portion of that gas market grows faster still. China is building import terminals, and demand is picking up, helping to keep LNG pricing toward oil parity on an energy-equivalent basis.

Bulls say

  • Woodside is a beneficiary of continued increase in demand for energy. Behind coal, gas has been the fastest-growing primary energy segment globally. Woodside is favorably located on Asia’s doorstep.
  • Woodside’s cash flow base is comparatively diversified, with LNG making it less susceptible to the vagaries of pure oil producers. Gas is a primary component of Asian base-load power generation.
  • Gas has around half the carbon intensity of coal, and it stands to gain market share in the generation segment and elsewhere if carbon taxes are instituted, as some predict.

Bears say

  • The global economy is cooling off and demand for energy will follow suit, particularly if Chinese growth rates taper.
  • Technological advances in the nonconventional US shale gas industry have the potential to swing the demand-supply balance increasingly in favor of the customer.
  • LNG developments are hugely expensive, and the balance sheet is at risk until such projects are successfully commissioned.