BHP’s oil and gas the key to transition at Woodside

Woodside chairman Richard Goyder. Picture: AAP

At BHP’s full-year results on Tuesday afternoon, CEO Mike Henry from London will re-enforce the pivot away from fossil fuels. First US shale, then coal assets and now the sale of the $13bn petroleum portfolio to Woodside Petroleum.

Sitting in Perth, Henry’s head of BHP’s Petroleum Geraldine Slattery has had her sleeves up putting the deal to bed.

For Woodside chairman Richard Goyder and his board, this acquisition must not only be path to growth, but must deliver a balance sheet for a shapeshifting not seen in the company’s history.

In the lead-up to COP26 in October in Glasgow, we are witnessing dramatic restructuring of the oil and gas sector where scale is a big factor in survival.

At his half-year results also on Tuesday, Santos CEO Kevin Gallagher described the takeover of the troubled Oil Search as building an unrivalled oil and gas business in the region. If the Woodside-BHP Petroleum deal goes through, the Aussie business that unlocked the North West Shelf for Australia back in the 1960s will be bigger than Santos.

Each month, as ESG pressure ratchets up, from activist investors to big lenders, so too does the cost of developing oil and gas projects. According to global investor Brookfield the higher cost of capital for deepwater offshore oil developments, compared with that for renewables, already implies an $80-per-tonne carbon price.

Like the Santos/Oil Search deal, a Woodside tie up with BHP Petroleum aligns projects where parties have been joint venture partners. Credit Suisse Saul Kavonic points out that by paying for the BHP assets with Woodside shares not cash, Woodside should have more capital than it knows what to do with even if it doesn’t sell down any assets, post deal.

That rebooted balance sheet will be critical to funding Woodside’s transition: from carbon offsets building on the four million trees the company is planting, to ambitious plans for blue and green hydrogen. Oil and gas has a strong future over the next decade but by the end of it, without this transition, the company’s fate will look more like thermal coal today.

Notable on the Santos analyst call on Tuesday was much interest in Gallagher’s plans for carbon capture and storage: the Moomba CCS project which is FID ready, and feasibility for a CCS hub at Bayu-Undan to handle emissions from Barossa reservoir emissions.

Woodside shares have slipped back since the news of a BHP deal became public with some shareholders unconvinced about the upside. Kavonic believes any short-term issues (like the overhang of Woodside shares owned by BHP shareholders) will be worth it with a clear line of sight to growth across three hubs, a stellar balance sheet and resolution of a new CEO. “All of a sudden Woodside now becomes a credible alternative for oil and gas exposure in Australia and that could see people leave Santos register and move onto Woodside register,” he said.

Speculation around the Woodside CEO has been running for weeks and the idea of a much bigger Woodside has even led to a suggestion that board might reopen the field. Yet Geraldine Slattery and the acting Woodside CEO Meg O’Neill are the two women who know these assets better than anyone. The question around Ms Slattery if she really were to take on top job, is how she could also be driving the sale of BHP assets and be part of the value split negotiations? As a new Woodside chief she would need to be able to defend the acquisition price to her new shareholders. Perhaps she could be carved out of negotiations, but then what is she doing in Perth?