The potential $20bn deal for Australia’s largest oil and gas producer, Woodside, to buy BHP’s petroleum division makes sense for both companies over the long term.
They put out statements on Monday in response to reports in The Australian about a possible tie-up, with BHP confirming that it was reassessing the future of its petroleum business and looking at a potential merger of these assets with Woodside, to be paid for with a distribution of shares to BHP shareholders.
More details of the proposed transaction are expected to be revealed over next few days with the release of BHP’s annual results late on Tuesday.
Coincidently, Woodside’s acting chief executive Meg O’Neill delivers the company’s half-yearly results on Wednesday morning (her first in the acting CEO role she assumed in April).
Whether the fine detail of the deal, which was first mooted in The Australian’s DataRoom column in July, makes sense for shareholders in the short term will depend on the terms.
There is no doubt that it will be significant, potentially a game-changer for Woodside, which some observers describe as having been through a “lost decade”, its shares falling from $63 in 2008 to below $22.
But its shareholders are clearly wary of it (or what they know of it so far), with Woodside shares falling on Monday on concerns that the company is set to issue more shares to BHP shareholders as part of the deal. In the short term it means more Woodside shares will be issued – possibly as much of 50 per cent of its capital – to be held by BHP shareholders, many of which may want to be getting out of fossil fuels.
An all-scrip deal could leave an overhang on Woodside stock with BHP potentially owning 53 per cent of a combined company. Woodside would need to issue another 111 per cent of scrip to fund the $23.7bn acquisition, CLSA said. “The stock overhang could be very large,” CLSA analyst Daniel Butcher said.
But over the long term the deal makes sense for both parties.
It allows BHP, which has been under continued pressure from activist shareholders to get out of fossil fuels, to offload its petroleum business to a company it knows very well.
It gives Woodside, which has struggled for years to come up with a credible growth story, a chance to get the scale in oil and gas that will make a significant difference to its long-term potential.
The company will become a major global oil and gas player with much more freedom to move, particularly in working out the future of its assets in the North West Shelf and the Scarborough gas field.
It allows BHP – whose chief executive Mike Henry signalled last year that the miner would be getting out of the thermal coal business, a move some shareholders argue was overdue – to tell increasingly aggressive ESG and climate-focused shareholders that it is reducing its exposure to carbon-based energy.
Like Woolworths recently floating off its liquor business into Endeavour, the move allows shareholders to make pure play investment decisions.
As major companies like BHP move away from petroleum and gas, those that choose to stay in the sector need scale and cash to transform their business model. Overnight Woodside gets that scale.
In the world energy business these days, it is a matter of get big or get out – a factor behind the Santos-Oil Search deal which is still playing out. Like the South Australia-based Santos, whose ownership was once protected by state government edicts, Perth-based Woodside has been a protected species which may satisfy nationalistic interests but limits the upside for its shareholders.
Then treasurer Peter Costello (now chairman of the Nine media group) blocked Shell’s bid for the company back in 2001 because of its key stake in the North West Shelf offshore gas field.
While the decision ensured Woodside stayed in Australian hands, it also saw off any upside from a foreign buyer and constrained its future in other ways.
The deal has many facets.
One is the fact that two women may be vying for the role of chief executive of the new improved Woodside: US-born acting chief executive O’Neill, a former ExxonMobil executive who stepped into the shoes of its long-serving former chief executive Peter Coleman under somewhat unusual circumstances, and BHP’s head of petroleum, Houston-based Geraldine Slattery.
Much has been made of the fact that Slattery has flown to Perth and is just finishing her two-week quarantine period.
Slattery, who grew up in Ireland, is a 25-year veteran of BHP’s oil and gas division. She has been head of BHP’s petroleum operations since March 2019.
O’Neill joined Woodside in May 2018 and is also a credible leader of the combined business.
As DataRoom observed when breaking the story in July, there are few buyers for BHP’s petroleum assets besides Woodside.
Woodside is still wrestling with issues including the future of its $16bn Scarborough LNG project in Western Australia, which it is keen to get on with.
Getting control of BHP’s 25 per cent stake in the project will make things a lot easier for Woodside, which will operate the project.
Similarly, BHP is a key shareholder in the ageing North West Shelf project. It has six equal shareholders, including Woodside, which is the operator.
Buying BHP’s stake in that project will also make decisions on its future much easier. Selling to partners is a lot easier than bringing in outside parties.
Then there is the difficult issue of Bass Strait, where BHP has a 50 per cent stake alongside operator ExxonMobil. BHP will have to wear half the cost of a potentially decade-long decommissioning.
The federal government has a keen interest in the future of that stake and could play a role if the BHP stake was sold to a foreign buyer it did not approve of.
Credit Suisse’s head of Australian energy research, Saul Kavonic, noted recently: “Woodside is in an advantaged position to acquire BHP Petroleum’s Australian assets given its asset knowledge, cost and joint venture synergies, pre-emptive rights and the limited pool of buyers.”
But as long-term Woodside follower Mark Samter noted this week, the deal will result in “a better collection of assets together than apart”. But he argues that the deal as it is currently mooted “feels like a horrible short-term outcome for Woodside shareholders”. “It doesn’t matter how good, bad or indifferent the deal is from a Woodside perspective, that is an awful lot of stock going into the hands of BHP shareholders who hate oil with a passion.
“That is not a reason for Woodside not to do the deal,” he said. “It doesn’t change the underlying value of the assets, but it could present a pretty ugly start to trading life for the combined entity.”
There are also questions about the future of Woodside’s attempts at offshore expansion, including a project in Senegal.
Another question is where the headquarters of the business will be: Perth or Houston?
BHP’s review of the future of its petroleum assets has not stopped it doing a deal recently to expand into the Gulf of Mexico.
It seems the logic behind the combination of assets is so strong that the deal is likely to go ahead.
But it could be a rocky ride in the short term for Woodside’s long-suffering shareholders.
