Monsters of Rock: BHP's petroleum nightmares as analysts, investors have their say on Woodside deal

The multi-billion dollar deal to carve out BHP’s (ASX:BHP) petroleum division into Woodside (ASX:WPL) would help the world’s biggest miner shave off some of its ESG risk while making Perth’s Woodside an international scale player in the oil and gas sector.

But not everyone is complimentary about the deal, which would see BHP shareholders given Woodside stock. It could be formally announced as early as BHP’s financial results this afternoon.

It faces pushback from, among other quarters, major Woodside shareholder Allan Gray Australia, according to media reports today.

RBC Capital Markets analyst Gordon Ramsay (not that one) suggested the merger could value BHP’s US$16 billion petroleum business, which still generates decent cash especially at its Gulf of Mexico assets, less than it is currently.

“BHP’s messaging to the market has been to advocate “investing in the right oil assets”, “which are advantaged“, but still “recognising some of the longer-term challenges to oil”,” he said.

“BHP has flagged strong returns and value generation from “select assets”, supported by robust underlying demand and natural field decline.

“Hence, it comes as a surprise that all petroleum assets are under review.

“The GOM assets are high-returning, cash-generative assets and present production growth.

“Recent brownfield growth initiatives have been focused on the GOM and been proven successful.

“BHP only last month approved capex for Trion and Shenzi North and also a countercyclical acquisition in 2021. So why would BHP give the GOM away at a discount to complete a WPL transaction?”

UBS highlights emissions target and rehab risks

UBS were more supportive of the deal on Woodside’s end, saying it could be value accretive at an equivalent price of around $21.50 a share.

Analyst Tom Allen noted BHP Petroleum’s ~US$1.5bn in free cash flow would provide Woodside with a stronger balance sheet to support growth initiatives like the Scarborough LNG project and at more than $40 billion market cap propel Woodside into the world’s top 15 O&G players.

But the addition of BHP’s petroleum assets brings longer term risk around how Woodside can meet its emissions reductions targets and manage heavier long-term rehabilitation liabilities.

“We believe a merger proposal will carry some risk of obtaining shareholder support given the Board are driving the proposal, without a permanent CEO appointed and it is a significant strategic step-out with potentially longer term, material rehabilitation risks,” he wrote.

“We identify opportunities for FCF accretion beyond FY23 and near term EPS accretion at our BHP-P valuation.

“However we recognise also, that a merger could see greater rehab costs on WPL’s balance sheet ($2.1bn at Feb-21) given WoodMac estimate rehab costs for Bass Strait (BHP-P 50%) at US$6bn 100% gross.

“We believe WPL must demonstrate its understanding of the long term rehab costs and how a merger supports its plans to reduce emissions by 30% by 2030 to help manage shareholder approval risk.”

Woodside shares tanked more than 4% on Monday as discussions were thrust into the open, before sinking almost 2% today. BHP was off around 1.5% at the time of writing.

Woodside and BHP share prices today:

PANTORO (ASX:PNR)

We’re deep in reporting season but there was a bit of news floating around the mid and large cap resources space.

One producer with a little to say was Pantoro, which is inching towards the development of its 50% owned Central Norseman gold mine, the longest running gold mine in the country before it was shuttered in 2014.

Today Pantoro, which also operates the 100% owned Nicolsons mine in the historic Halls Creek gold district up in WA’s Kimberley gave its strongest indication yet it is taking a regional-scale approach with the Norseman development.

The miner emerged from a trading halt with a 19.9% stake in Maximus Resources (ASX:MXR), which owns the nearby Spargoville gold project in the WA Goldfields, following a $12 million placement led by Petra Capital.

Maximus’ most interesting asset is the Wattle Dam gold mine near Kambalda, a 10g/t company-maker for Ramelius Resources (ASX:RMS) once renowned as Australia’s highest grade gold mine.

“Maximus has recently assembled a quality exploration and management team, which has delivered strong gold and nickel results consistently during the past twelve months,” Pantoro boss Paul Cmrlec said.

“Pantoro is confident that Maximus, now properly funded, will continue its success in definition of substantial resources within its tenements.

“We look forward to assisting Maximus to achieve its goals, and ultimately realising the synergies that exist between our projects for the benefit of shareholders of both companies.”