A lack of genuine growth stories in the ASX 20 is a frequent...

A lack of genuine growth stories in the ASX 20 is a frequent complaint of investors but Woodside Petroleum’s surprise $2.5 billion equity raising during the February reporting season raised the question of whether this stock is offering a new global growth story investors should back.

I am saying “yes’’ but rate the case for the stock at $30 as complex rather than simple and compelling. The big picture for Woodside is attractive as China replaces some of its coal-fired electricity production with gas to reduce air pollution, and oil prices — and by extension gas prices, which lag oil — have further upside. Any reservations concern Woodside’s capital management and the long horizon for returns on the equity recently raised.

To start with the stock’s positive macro, oil prices are starting to break out of a three-year downtrend and forward prices, now at a significant discount to the spot price, should pick up from here. We see Brent crude prices rising above $US70 over the year ahead, which would support Woodside’s earnings and share price.

Harbour Energy’s takeover bid for Santos implies a $US75 a barrel oil price and backs the above themes, as well as a likely surge in Australian domestic gas prices as Victoria runs low on gas towards 2022. This surge in prices could be necessary to stimulate urgent investment in domestic supply. In our view Woodside shares are worth about $32 at oil prices in the low $US60s, but could be worth $40 at $U75 oil. (Woodside is trading at $29.92)

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