Power Up: Proposed Woodside, BHP Petroleum merger is all about scale

Woodside Petroleum (ASX:WPL) is taking a page out of Santos’ (ASX:STO) playbook and merging with BHP’s (ASX:BHP) petroleum business in a massive deal worth an estimated $20 billion.

This is no small matter. While BHP’s petroleum business is just one arm of the mining giant’s extensive global business, it still rivals Australia’s largest oil and gas companies all on its lonesome.

Highlighting this, BHP’s petroleum business delivered revenue of US$5.92 billion ($8.1 billion) in the 2019 financial year while Woodside, which operates over the calendar year, reported revenue of US$4.87 billion.

Under the agreement, Woodside will issue new shares to BHP’s shareholders with the existing Woodside shareholders owning 52% of the expanded company while BHP shareholders hold the remaining 48%.

Woodside’s newly appointed managing director Meg O’Neill, who had been the company’s acting CEO prior to her appointment, said the merger will deliver a stronger balance sheet, increased cash flow and enduring financial strength to fund planned developments in the near term and new energy sources into the future.

“The proven capabilities of both Woodside and BHP will deliver long-term value for shareholders through our geographically diverse and balanced portfolio of tier 1 operating assets and low-cost and low-carbon growth opportunities,” she added.

“The proposed transaction de-risks and supports Scarborough FID later this year and enables more flexible capital allocation. We will continue reducing carbon emissions from the combined portfolio towards Woodside’s ambition to be net zero by 2050.”

Following the merger, Woodside will have a conventional asset base producing about 200 million barrels of oil equivalent with 46% of that in LNG, 29% oil and condensate, and the remaining 25% consisting of domestic gas and liquids.

It will also have wide geographic reach with production from Western Australia, east coast Australia, US Gulf of Mexico, and Trinidad and Tobago with approximately 94% of production (FY21 net production) from OECD nations.

Woodside will also have proved and probable reserves of over 2 billion boe comprising 59% gas, and 41% liquids.

A new ‘super-independent’

Wood Mackenzie research director Andrew Harwood noted earlier this week that 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”.

He added that BHP’s Gulf of Mexico oil operations would complement Woodside’s deepwater capabilities and add a new core focus area to Woodside’s existing portfolio.

“BHP has recently sanctioned US$800 million of new investment at the Shenzi hub in the GoM and is progressing the Trion project in Mexico,” Harwood noted.

“Woodside would also strengthen its position in its key North West Shelf LNG and Scarborough assets. Woodside would be firmly in control of the Scarborough development but will continue to look for new partners to optimise future capital outlays.”

Hardwood noted that BHP had long been rumoured to be looking to exit petroleum and that a merger with Woodside, coming on the heels of Santos’ proposed merger with Oil Search, is evidence that oil and gas plays are looking to insulate themselves from longer-term uncertainty by doubling down on long-term, cash-generative, resilient resource themes.

“For the wider Australia E&P sector, a second merger proposal will give Australia another homegrown heavyweight that can compete on the international scene,” he added.

“The inevitable optimisation of enlarged portfolios will also provide opportunities for other players looking to squeeze value from assets deemed surplus to requirements by these newer and bigger entities.”

Any Woodside merger proposal will likely include the issue shares to BHP and it seems unlikely that the Australian gas major would be the only potential suitor.

Gas approval ruffles feathers

Meanwhile, the Victorian government’s decision to green light Beach Energy’s (ASX:BPT) plan to produce gas from a field located below the Port Campbell National Park has predictably drawn criticism from green groups.

Citing the site’s proximity to the world famous Twelve Apostles, the Greens told The Guardian no one would visit the tourist site if it was surrounded by gas drilling rigs.

While their concern is understandable, the successful discovery comes as gas supplies on the east coast are dwindling, makes it pretty unlikely that a new gas field would not be developed.

It also ignores state energy and climate change minister Lily D’Ambrosio noting that the operation is located on privately-held ground and that no work can be conducted within the national park.

Earth Resources Regulation executive director Anthony Hurst added that any operations had to be carried out within Beach’s existing onshore footprint.

The exploration well was drilled using extended reach techniques from the onshore drill pad and there’s nothing stopping the same technique being used for production.