What would a $40bn deal between Woodside and BHP look like for shareholders?
A $40bn combination of their oil and gas assets would shift BHP neatly into Mike Henry’s ‘future facing commodities” narrative, but what would it do for Woodside?
A deal between Woodside and BHP on a $40bn combination of their oil and gas assets would shift BHP neatly into Mike Henry’s “future-facing commodities” narrative, but what would it do for Woodside?
On the face of it, the deal would immediately double Woodside’s annual output. BHP’s global assets produced about 103 million barrels of oil equivalent last financial year, with Woodside targeting 90-95 mmboe in 2021.
It also provides Woodside with a path to growth outside of the much-maligned $US12bn ($16.4bn) Scarborough project, through the acquisition of BHP’s stronger growth profile in the Gulf of Mexico.
Having somehow left itself with only a single major growth asset, Scarborough, Woodside is a bit stuck. With net debt of $US3.9bn at the end of last year, its only major option is a massive spend on a project that is seen, at best, as a bit marginal.
Without Scarborough, as CLSA analyst Daniel Butcher notes, Woodside’s production profile is in a strong decline over the next decade.
“On its currently sanctioned portfolio of assets, Woodside production will decline from 101mmboe in 2020 to 87mmboe by 2023,” Mr Butcher said.
“It will then receive a 16mmboe boost from Sangomar commencing in 2024 (at 50 per cent interest), but both Sangomar and the ageing North West Shelf will decline to half their original production rates by about 2028. Woodside will be producing only 74mmboe by 2030 without new project investment decisions.”
Led by the North West Shelf and Bass Strait, now in terminal decline, BHP is also facing a falling output profile.
Output from existing and under-development projects would tumble from current levels to about 46mmboe by 2030, according to Bernstein analyst Bob Brackett.
But BHP has options. With Woodside it has Scarborough, although its commitment to the $US12bn project has been far from full-throated. And it also has enough pre-development projects in the Gulf of Mexico – in both US and Mexican waters – to return its total output to levels above 100mmboe by the end of the decade, according to Mr Brackett.
Those projects are oil-heavy. That’s a departure for Woodside, but that’s where Mr Henry and BHP petroleum boss Geraldine Slattery – now surely in the front seat to lead Woodside in the event of a merger – have said they see the best returns over the period.
A deal would be, without doubt, transformative for Woodside.
It would instantly catapult the company into the top echelon of global producers, by market capitalisation, leapfrogging major global players such as Repsol, Hess, and Petrobras to sit close to ENI’s ranking just outside the 10 biggest global players in the space.
It would deliver growth options, stronger cashflows as it weighs major capital investments, with the improvement in its balance sheet also delivering far stronger debt gearing metrics, according to CLSA analysts, giving it flexibility to make decisions on the timing of its growth portfolio.
And the timing would be about right. Mr Henry has said publicly that BHP sees petroleum – and particularly oil-heavy production – as having at least another strong decade ahead, and probably a bit more.
For that period, at least, Woodside would be a major player on the global stage as it weights an entry into hydrogen, ammonia and other future energy commodities – not something to be discounted, given it will have access to a substantial portion of gas production earmarked for WA domestic use.
But it also comes with some issues on the side – not least the increased capital spending that is one of the factors believed to have eased Mr Henry’s decision to engage with a sale of the division.
BHP allocates about $US500m annually to oil exploration and, while key capital spending projects – including the $US283m expansion of the Ruby project in Trinidad and Tobago and the $US2.15bn spend on the second phase of Mad Dog in the Gulf of Mexico – are complete, or close to, there is plenty more to come.
BHP announced another $US802m worth of spending in August, including an expansion of the Shenzi North project and the $US258m FEED study on the Trion oil project in Mexican waters – a prelude to a final investment decision next year, potentially worth another $US5bn.
Trion also poses something of an issue for an enlarged Woodside.
BHP holds 60 per cent of Trion, with Mexico’s state-owned PEMEX the rest.
The loss-making Mexican oil producer had its credit rating cut to junk by Moody’s Investors Services this month over concerns about its debt levels and “increasing business risk” as the government of Mexican President Andres Manuel Lopez Obrador takes a more nationalistic approach to the country’s oil and gas industry.
BHP clearly thinks its heavyweight international credentials will immunise it from that sort of resource nationalism.
Even if Ms Slattery, with BHP’s existing relationships in Mexico in hand, takes the top job at the enlarged Woodside, it remains to be seen if the Australian major would have the kind of clout to maintain its grip on Trion – without which the growth story looks a little iffy.
But the story looks good for Woodside.
The issue will be price, as it always is. Both companies face a serious sales job with shareholders to get a deal over the line.
