Monsters of Rock: Woodside-BHP deal clears major hurdle, now it's up the shareholders

Independent expert report says Woodside’s deal to merge with BHP Petroleum is in best interests of shareholders
Merger to be put to vote at Woodside AGM May 19
Steel production lifts in late March in China, some good news for iron ore producers amid the gloom of its Covid lockdowns

Woodside Petroleum (ASX:WPL) has got the all clear from independent expert KPMG that its merger with BHP Petroleum (ASX:BHP) is in the best interests of shareholders, setting the scene for the tie-up to be completed on June 1 this year.

The deal will create a single $40 billion energy company ranked among the world’s top 10 oil and gas producers.

It will also take Perth-based Woodside onto the world stage, with the firm to seek a secondary listing on the London Stock Exchange and a sponsored Level III ADR listing in New York to expand its investment profile internationally.

BHP has been seeking an option to relinquish its fossil fuel assets in a bid to green up its portfolio since a major strategic shift in 2020, announcing the Woodside deal with its annual results last August.

Woodside shareholders will hold 52% of the combined entity, with BHP investors receiving one WPL unit for every 5.5340 BHP shares in their portfolio. At WPL’s April 6 price of US$25.55 a share, BHP’s petroleum business will be worth US$23.4b.

The Big Australian will deliver the shares in and in specie dividend valued currently US$4.62 a share, with US$1.98 a share of franking credits totalling US$10b to be doled out.

It comes just two days after Woodside secured its final key approvals for the massive US$12b Scarborough gas project off WA’s north west coast.

Fair and reasonable

A key component of any merger is the independent expert’s report, which gives an insight to shareholders of both the buying and selling company whether they’ve been hoodwinked by the PR when a deal is announced.

In this case, KPMG says the price paid is on the money.

“We have assessed the full underlying value of Woodside as a standalone entity to be in the range of US$16,978 million to US$19,424 million, which equates to an assessed value per Woodside share of between A$23.09 and A$26.429,” it said.

“This compares to our assessed full underlying value for the Merged Group in the range of US$37,242 million to US$42,302 million, which equates to an assessed value per Merged Group share of between A$26.25 and A$29.81.

“We have also considered that based on our assessment of the full underlying value of Woodside and BHP Petroleum as standalone entities, the aggregate 52% interest that Woodside Shareholders will hold in the Merged Group is broadly consistent with Woodside’s contribution to the Merged Group.”

WPL is worth US$32.73 currently, with oil and gas prices surging since the deal was announced last year.

But KPMG has been kinder than it sounds like it was with IGO’s (ASX:IGO) bid for nickel miner Western Areas (ASX:WSA), which sounds like it’s going to dump its recommendation for IGO’s $1.1b bid on the back of the expert report after nickel prices went through the roof due to the Russian invasion of Ukraine.

Woodside will hold its AGM on May 19, where shareholders will vote on the acceptance of the merger, which will give Woodside a production base of 193 million barrels of oil equivalent, 10.3Mtpa of LNG and growth projects at Mad Dog 2, Sangomar, Shenzi North and Scarborough.

Chinese steel factories hit their straps after the Olympics

Some good news for iron ore companies today who may be worried about the scale of the Covid outbreak in Shanghai.

The China Iron and Steel Association reports that in the last 10 days of March its member mills ramped up production by 5.4% on Mid-March levels to 2.16Mt per day.

Extrapolating out, it thinks production hit 2.79Mt/day in late March, levels that would track at over 1Bt on an annualised basis.

Its a solid recovery from the massive dips seen last year and the subdued steel making numbers during the Winter Olympics and Paralympics, where Beijing wanted ‘clear blue skies’ and restricted steel mills to prevent pollution.

That uptick in output has been predicted for some time, especially with the Chinese Government getting louder about supporting economic growth after the issues it saw with its falling property sector last year.

Consultants MySteel say China’s blast furnace capacity utilisation is up around the 84.95% mark, around 10% up on the two year lows seen around October and November when environmental restrictions were put in place to reduce steel production, hitting iron ore prices hard.

Singapore futures however slid 1.97% to US$153.45/t as the Covid lockdown worsened in China, with nearly 20,000 cases reported in Shanghai on Thursday.

Iron ore miners were broadly up to finish the week, with a 1.68% gain for BHP on the Woodside announcement leading the Materials sector to a 1.21% gain as of 3.45pm AEST.

Gold stocks were strongly supported as were lithium and uranium plays, with Paladin (ASX:PDN) the big mover, up more than 13% as spot uranium rose to US$62.75/lb according to Numerco.

Energy Resources of Australia (ASX:ERA), which is working on the closure and rehabilitation of the Ranger uranium mine in the NT, was also up after releasing its quarterly activities report.

The Rio Tinto (ASX:RIO) subsidiary sold 400,000lb of uranium oxide onto the spot market in the March quarter, and has 136,000lb of inventory remaining to help back what will be a $1.6-2.2b rehab job.