BHP and Woodside close in on petroleum deal in $40bn asset merger
A deal for Woodside to buy BHP’s petroleum assets is expected this week, catapulting the Perth oil and gas company into a player on the global stage.
A deal for Woodside to buy BHP’s petroleum assets is expected this week, catapulting the Perth oil and gas company into a player on the global stage.
Sources told The Australian that a strategy and communications briefing was being worked up for BHP selling petroleum assets to Woodside, ahead of the two companies reporting their results on Tuesday and Wednesday respectively.
BHP’s global petroleum chief Geraldine Slattery has landed in Perth, intensifying speculation a $40bn asset merger between the two resources heavyweights is near.
Amid negotiations for a $21bn merger between Santos and Oil Search, a deal between BHP and Woodside would fundamentally reshape Australia’s oil and gas sector.
If Woodside doesn’t do a deal, it will lose its prized position as Australia’s largest energy producer to a beefed-up Santos.
The deal makes sense given BHP’s stated desire to focus on “future-facing commodities” in its portfolio, while – depending on the assets up for grabs – Woodside will gain scale and geographical diversity by entering a tie-up.
“We expect BHP will look to divest its entire fossil fuel exposure including its entire petroleum division. BHP Petroleum simply no longer fits within BHP‘s portfolio or future-facing strategy,” said Credit Suisse analyst Saul Kavonic.
“After having waited too long to divest thermal coal, and now having to resort to selling for cents on the dollar, BHP should know it’s better to exit petroleum sooner rather than later.”
A deal could see Woodside pay for the BHP assets with its own scrip that could then be partially distributed to BHP shareholders, with BHP seen as likely to retain a 15 to 20 per cent stake in the West Australian gas producer.
“BHP could find a reasonable buyer pool for its Gulf of Mexico and Trinidad assets if sold separately, but Woodside would be the primary, perhaps only, credible buyer for BHP Petroleum’s Australian assets, so it may be easier to divest most assets or the entire petroleum portfolio to Woodside in one transaction,” Mr Kavonic said.
“And BHP shareholders could continue to participate in the synergies should they choose to if done as a scrip deal.”
JPMorgan also sees logic in the combination between the two companies.
“There has been much speculation about Woodside’s potential interest in acquiring BHP’s oil and gas assets. We see merit in this potential transaction and look forward to Woodside addressing this speculation,” JPMorgan analyst Mark Busuttil said.
A scrip deal is seen as the most likely structure but it may face hurdles from investors.
“The primary question for the investment community will revolve around price and how Woodside could pay.
“A cash deal could leave Woodside still dependent on selldowns or an equity raise,” Mr Kavonic said.
“A scrip deal would leave Woodside with a very strong balance sheet to fund growth without selldowns, but could leave a stock overhang as some BHP investors may not have a long term mandate to hold Woodside shares.”
While both BHP and Woodside have remained tight-lipped on whether they are in talks, rumours of a potential tie-up have been circulating in the oil and gas sector since early this year when Woodside made the bizarre decision to allow former boss Peter Coleman to leave early without announcing a permanent replacement.
Ms Slattery has also been identified as the next leader of Woodside itself, replacing Meg O‘Neill as interim chief, with a deal between the two companies potentially sealing that appointment in addition to the asset swap.
Woodside wants to sanction its giant $16bn Scarborough project by the end of 2021 but BHP, which owns a quarter of the development, still has to agree on commercial terms for any deal.
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