BHP, Woodside face hurdles to $40bn oil deal
A $40bn petroleum deal with BHP would fast-track Woodside into a globally significant energy player but a key shareholder is vowing to vote against the deal.
A $40bn petroleum deal with BHP would fast-track Woodside Petroleum into a globally significant energy player but securing a deal still faces significant hurdles with a key shareholder vowing to vote against the all-share deal if it proceeds.
The resources giants’ confirmed multiple reports by The Australian that they are in advanced talks over a merger that would see Woodside buy BHP’s entire petroleum portfolio through an all-scrip deal that would then see Woodside shares allocated to BHP shareholders.
While the move would transform Woodside into an international producer with operations spanning the world, one of its biggest shareholders has already threatened to oppose a deal which could double the WA company’s market capitalisation to $40bn.
“I think it’s a nuts thing for Woodside to do. It’s absolutely crazy,” said Simon Mawhinney, managing director of Allan Gray which holds nearly 5 per cent of Woodside shares. “And unless they can buy these assets at a very cheap price, I think it would be madness.”
Australia’s energy sector is undergoing its most profound restructuring in a generation as companies look to bulk up through consolidation after last year’s pandemic-sparked oil price rout.
Santos is in talks with Oil Search for a $21bn merger, the biggest local move as part of a global deal spree, while Woodside’s ambitious ploy would see it just outside the cusp of the world’s ten largest energy producers with BHP’s assets spanning Australia, the Gulf of Mexico and Trinidad and Tobago.
“Following hot on the heels of Santos’ proposed merger with Oil Search, a Woodside-BHP combination is further evidence of oil and gas operators seeking solace from longer term uncertainty through scale, and doubling down on long-term, cash-generative, resilient resource themes,” Wood Mackenzie research director Andrew Harwood said.
“For the wider Australia exploration and production sector, a second merger proposal will give Australia another homegrown heavyweight that can compete on the international scene.”
Beach Energy boss Matt Kay – a former executive at Woodside, Santos and Oil Search – said there was logic for its competitors to chase scale.
“We point to the fact that with high oil prices and low interest rates at the moment, it smells a bit more like a sellers’ market than a buyers’ market,” he told The Australian.
Still, an all-scrip deal however could leave a serious overhang on Woodside stock with BHP potentially owning 53 per cent of a combined company, broker CLSA said. Woodside would need to issue another 111 per cent of scrip to fund the estimated $23.7bn acquisition.
Handing over so much control to BHP and the dilution of franking credits are major barriers, according to Allan Gray.
“We would be issuing a huge amount of shares to another shareholder. We will be voting against this,” Mr Mawhinney said.
“It dilutes our franking credits. It increases our exposure to oil away from gas and it introduces very mature assets and rehabilitation provisions far in excess of what Woodside shareholders have become accustomed to.”
BHP boss Mike Henry is under growing pressure from climate focused investors to exit the mining giant’s fossil fuel positions, with the company already having put its thermal coal assets on the market.
However Argo Investments, which holds stakes in both companies, said it did not think climate pressures were forcing BHP’s hand on petroleum compared to coal.
“I don’t think petroleum has precluded anyone from owning BHP when you look at it from a weighting of what they earn overall and the asset mix they have,” Argo managing director Jason Beddow said.
An all-scrip deal would allow BHP an exit from directly operating in the fossil fuel sector, while still retaining some exposure through Woodside to an oil and gas rebound as the global economy recovers from the Covid pandemic.
Key to the negotiations is the clean-up cost of BHP’s older assets, particularly the ageing Bass Strait oil and gas fields operated by Exxon, given the multi-billion dollar closure costs would weigh far more heavily on its balance sheet than that of BHP.
Sources say the federal government’s tougher stance on forcing operators of older oil and gas fields to retain ultimate responsibility for clean-up costs may help smooth those discussions, with one option said to be under consideration is for BHP to retain the clean-up liability for a higher upfront deal premium.
Resources Minister Keith Pitt said he was watching the mooted deal.
“Any future owner/operator should be aware of the Government’s proposed legislative and regulatory changes aimed at strengthening Australia’s decommissioning regime. These changes will ensure a higher level of financial scrutiny on transactions relating to title transfers, an extension of existing financial assurance provisions and the introduction of a trailing liability regime as a last resort to ensure decommissioning costs do not fall to Australian taxpayers,” Mr Pitt said.
BHP’s global petroleum chief Geraldine Slattery has landed in Perth, with some expecting she may be installed as Woodside boss given the company remains without a permanent chief executive after the departure of Peter Coleman earlier this year.
BHP reports its results after market close on Tuesday with Woodside to follow on Wednesday morning.
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 Mr Coleman to leave ahead of schedule, without announcing a permanent replacement in its top job.
The ability for Woodside to diversify from its West Australian base and single Australian growth asset in Scarborough would be eased if a deal proceeded, Morgans said. BHP owns a stake in Scarborough which is still awaiting a final investment decision and also a one-sixth share of the North West Shelf plant, already operated by Woodside.
The tie-up would also boost Woodside’s exposure to oil, potentially delivering higher returns than its current reliance on LNG exports.
“A merger would create a new international ‘super independent’ built for scale and resilience, with a long-term focus on LNG but exposure in the medium term to high-margin, deepwater oil,” WoodMac’s Mr Harwood said.
“Strong cash flow from BHP’s Gulf of Mexico assets over the next decade will provide steady shareholder returns while supporting planned investment across the wider business in LNG growth and new energy opportunities.”
BHP fell 1.4 per cent to $52.07 while Woodside dived 4.6 per cent to $21.18.
