Woodside, BHP merger to create large gas portfolio with oil upside: Rystad
The entity created by the merger of Woodside and BHP’s petroleum business is expected to combine cash-generative near-term development opportunities from latter’s oil portfolio with long-life gas assets from both companies, creating a player unique in having an essentially pure-OECD, pure-conventional reservoir portfolio, Rystad Energy said in a note published on August 17.
“The creation of an expansive business presents many attractions in terms of growth opportunities, diversification, cost rationalisation on overlapping asset bases, and increasing likelihood of self-funding the upcoming Scarborough/Pluto Train 2 project,” it said.
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Rystad Energy, however, stated that questions are likely to linger until successful completion of the merger – which is subject to shareholder vote in Q2 2022. The points of concern include implied values of the BHP decommissioning liabilities in the Bass Strait; the value of the Scarborough/Pluto Train 2 project in light of an offered $1bn payout option to BHP for its 26.5% share of Scarborough, and in the event the merger does not proceed; and whether shareholders will be in favour of an all-stock transaction.
Woodside's shares dipped on the news, but recovered some of the ground later in the day. By contrast, shares in Santos and Oil Search were up slightly. Some analysts thought that Woodside had struck a favourable price, while BHP would benefit from being out of oil and gas, which would offset the discount.
Scarborough and NWS LNG
The Scarborough project consists of three gas fields: Scarborough, Jupiter and Thebe. Woodside operates the fields with a 73.5% interest in Scarborough and 50% interest in the other two, while BHP owns the remaining stakes in each.
One key feature of the proposed merger is that, if a final investment decision for Scarborough is taken by December 15, 2021 but the merger does not proceed, BHP will have an option to sell its 26.5% stake in Scarborough to Woodside for $1bn, with a further $100mn contingent payment if Thebe is sanctioned in the future. The option can be exercised by BHP in the second half of 2022. In this scenario BHP may still retain ownership of its other petroleum assets.
In addition, Woodside has stated that it is targeting a sell-down of up to 49% of Pluto Train 2, in which it currently holds a 100% interest. The company is also testing the market with a view to reducing its stake in the Scarborough project.
“A successful merger would give Woodside a measure of flexibility to sell down stakes in either the upstream or the LNG without the need to align itself with any partners on strategy and value,” Rystad Energy said.
The combined upstream portfolios would see Woodside double its interest in its operated NWS LNG to 33.34%. The onshore facility – in which Woodside partners BHP along with Chevron, Shell, Mitsubishi Corp and Mitsui – consists of five LNG trains, a domestic gas plant to supply Western Australia, LPG production units and storage and loading facilities.
Domestic gas portfolio would also expand
According to Rystad Energy, the merger would also expand Woodside’s pipeline/domestic gas business. In Western Australia, BHP operates the Macedon and Pyrenees projects, with Santos as JV partner. BHP’s equity share of production from these assets amounted to about 30,000 barrels of oil equivalent/day in 2020. Woodside would also take on BHP’s stake in the Gippsland Basin joint venture and the Kipper-Tuna-Turrum project offshore Victoria – a declining legacy asset.
“What the proposed merger deal value implies for the value of decommissioning liabilities assumed by Woodside – most of which will be associated with these assets – remains to be seen if and when the deal completes, assuming the companies provide detailed disclosures,” Rystad Energy said.
Rystad Energy values the entire BHP petroleum division net of abandonment expenses at $13.2bn. Relative to the proposed 52:48 merger ratio, based on Woodside’s closing market capitalisation at close of August 17, it estimates the deal implies value of $15bn for the BHP petroleum portfolio at a 0.75x exchange rate.
“We note that BHP and Woodside’s due diligence and assessment of decommissioning costs may differ substantially from Rystad Energy’s current estimates. The two companies also estimate annual synergies to be realised from the merger to be in excess of $400mn per annum (pre-tax),” Rystad Energy said.
High-margin Gulf of Mexico oil
Outside Australia, the companies share no overlapping asset positions. Woodside would, however, be set to take over a large, high-margin, cash flow-generative position in Gulf of Mexico (GoM) oil. An attractive near-term investment opportunity in the Mexican part of the GoM is Trion. Rystad Energy values BHP’s US GoM assets at $6.2bn, leaving around $7bn for the rest of the portfolio.
Santos-Oil Search merger
The announcements from Woodside and BHP follow those of Santos and Oil Search agreeing on a merger ratio and due diligence process for their own merger.
“Contrasting the two mergers is illuminating, given some scepticism with regards to the Woodside/BHP merger on valuation issues, despite the near-term cash flow-accretive opportunity espoused by management, and the creation of a globally significant company with a clear differentiator in terms of its OECD-heavy, fully-conventional portfolio,” Rystad Energy said.
“The Santos/Oil Search merger, on the other hand, has been publicised as a “logical” creation of a “regional champion”, despite the only overlap in operations being the stakes currently held by these companies in the PNG LNG JV in Papua New Guinea,” it added.