The Woodside Energy Group Ltd (ASX: WDS) share price has fallen 1% as investors digest the news that the oil price fell overnight, as well as a broker downgrade.
As a commodity business, the price of the resource is key to how much profit is possible. It costs roughly the same amount each month for Woodside to extract resources. Any extra revenue that it can get for its production largely translates into additional profit before tax for the company.
However, it works in reverse when the commodity price falls. Any reduction in revenue is largely a bad thing for the profit before tax.
What’s happening today?
As reported by my colleague James Mickleboro earlier this morning, the WTI crude oil price fell overnight by 2% to US$79.75 per barrel and the Brent crude oil price was down 1.7% to US$83.44 per barrel.
Ratings agency Fitch just cut the US debt rating to AA+ from AAA. This seems to have spooked the market, and indirectly hurt the Woodside share price. Why did Fitch downgrade its view on the US?
It’s because of the US debt ceiling and the political situation.
Richard Francis, Fitch’s co-head of the Americas sovereign ratings, said to CNBC:
This is a steady deterioration we’ve seen in the key metrics for the United States for a number of years. In 2007, general government debt was less than 60% and now it’s 113%, so there has been a clear deterioration.
Furthermore, we’re expecting fiscal deficits to rise over the next three years and we expect debt to continue to rise over the next three years.
Given the high level of the debt, given the increasing deficits that we’re expecting, and given the kind of deterioration in governance and unwillingness to really tackle these issues, we don’t think that’s consistent with the AAA anymore.
This idea that the economy somehow, we skirt a recession and there should not be a downgrade, that’s just not really what we’re looking at. We’re looking at a more fundamental picture of the United States, creditworthiness and also kind of what we expect to happen over the next few years.
The Fitch executive also said that there had been “constant brinkmanship” with the debt ceiling among both Republicans and Democrats.
Broker downgrades rating on the Woodside share price
Sometimes a broker changes their opinion on whether an ASX share is worth buying or not. The price target tells investors where the broker believes the share price will be in 12 months – sometimes it implies a rise will happen and other times it’s suggesting a decline.
According to reporting by The Australian, the broker JP Morgan just cut its rating on Woodside Energy shares to underweight, meaning sell. The price target is $36.30, which implies a potential fall of the Woodside share price of around 3%.
However, if we add in the possible dividend for investors, the total shareholder return might be positive. Commsec estimates currently show a possible grossed-up dividend yield of 8.1% from Woodside in FY23.
