Woodside investors cautious on $40bn BHP deal
After unveiling the blockbuster merger deal with the mining giant on Tuesday, Woodside shareholders are waiting for further details.
Woodside Petroleum’s $40bn petroleum merger with BHP has received a mixed reception as investors digest the deal ratio and a clause that puts pressure on its $16bn Scarborough gas project.
After unveiling the merger deal with the mining giant on Tuesday, Woodside shareholders are waiting for further details before taking a view of the company’s biggest ever corporate shake-up.
One of its biggest shareholders, Allan Gray, which has already threatened to oppose a deal, said it needed further clarity before getting on board with any tie-up.
“My opinion is that we have the details of this deal and it’s impossible to tell at this stage and there’s a lot of unknowns and questions that require answering,” said Simon Mawhinney, managing director of Allan Gray, which holds almost 5 per cent of Woodside shares.
The merger will give BHP a 48 per cent stake, compared to Woodside’s 52 per cent and Mr Mawhinney said he was still digesting the ratio when weighed up against the assets Woodside would acquire.
“What you get in exchange is all that matters. We hand over 48 per cent, but what do we get in exchange? I think that’s the big unknown,” Mr Mawhinney said, ahead of speaking with Woodside chairman Richard Goyder on Wednesday.
Woodside shareholder Maple-Brown Abbott said it was pleased the deal was going to a shareholder vote early next year, but said it still needed to work through the fundamentals of how it stacked up. More than 50 per cent of investors will need to support the plan for it to go through.
However, issues such as the level of BHP decommissioning liabilities assumed by Woodside remain unknown, with some in the market assuming about $US4bn ($5.5bn) of clean-up costs would be carried over.
“Some of the questions which the brokers got excited about last night such as environmental liabilities I’m not sure if they will be in the telephone book, but hopefully there’ll be some more information so we can make a better informed decision,” said Dougal Maple-Brown, head of Australian equities at Maple-Brown Abbott.
“The decision is going to be nine months away. And the oil price could be $US150 or it could be $US20.”
A complex arrangement surrounding its $16bn Scarborough gas project off the West Australian coast has also vexed analysts. The development is jointly owned by Woodside and BHP, but a clause will allow BHP to sell its stake to Woodside for $US1bn in case the deal does not proceed.
The move “boxes” Woodside into a final investment decision before the end of the year and prior to the merger being concluded, Credit Suisse said, as essentially Woodside would have to pay $US1bn if the deal fell over.
Woodside on Wednesday lifted its underlying net profit after tax to $US354m as the recovery in energy markets lifted the price of crude back above $US70 a barrel.
That fell short of analysts’ consensus of $US489m, but marked a welcome recovery after a giant $US4.1bn loss a year ago, when the Perth-headquartered company was battered by writedowns and an oil slump that routed earnings.
Revenue for the six months to June 30 rose by just under a third to $US2.5bn, while the company declared a dividend of US30c a share, up from US26c a year ago.
Production volumes for the full year were trimmed to 90-93 million barrels of oil equivalent, from 90-95 million boe previously.
Woodside looked to have won a generous deal from BHP, but the deal faced a giant stock overhang given $10bn of shares could change hands, CLSA said.
CLSA estimates the merger ratio should have been closer to BHP at 51 per cent and Woodside 49 per cent.
“We think the 52:48 merger ratio represents a transfer of value from BHP to Woodside shareholders of a few per cent, assuming we have their relative valuations correct,” CLSA analyst Daniel Butcher said.
Depending on ratio assumptions, Woodside shares could re-rate by 6-12 per cent.
The shake-up of Australia’s energy landscape boosts Woodside’s balance sheet but comes with a massive equity hangover.
While the unification of the BHP dual-listed structure in Australia would reduce overseas churn, $10bn of stock could still change hands.
Still, it sees major growth projects like Scarborough can be funded without an equity raising.
“The debt-free acquisition of BHP-Petroleum means Woodside is effectively doing a back-door over-raise of equity,” Mr Butcher said.
“Major growth projects can be funded from cashflow and debt without gearing exceeding 30 per cent. This should broadly accord with company targets and maintaining a credit rating of BBB+”.
The $US400m of promised synergies seems questionable, CLSA said, which thinks cuts to exploration spending makes up part of that number.
Woodside shares fell 2.1 per cent to $20.29.
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