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A disappointing exit price for BHP’s oil and gas assets

18082021_BHP

A disappointing exit price for BHP’s oil and gas assets

BHP is accelerating its retreat from fossil fuels with a deal to sell its global oil and gas assets to Australian energy giant Woodside Petroleum. The companies announced an all-stock merger of BHP’s entire petroleum division spanning Australia, the Americas and North Africa with Perth-based Woodside.

Following the demerger of the suite of second tier assets into South32 (ASX:S32) in 2015, BHP have really got the decarbonisation bug by selling an estimated US$20.5 billion worth of their oil and gas assets to Woodside Petroleum (ASX:WPL) for the equivalent of US$13.5 billion, based on Tuesday’s WPL closing price of $20.73 per share.

BHP’s Oil and Gas Assets Location Status Valuation (US$)
Scarborough WA Development 0.8
Australian Production WA Production 0.9
Bass Straight Victoria Production 5.5
North-West Shelf WA Production 2.3-4.3 (1).
Atlantis Gulf of Mexico Production 2.5
Shenzi Gulf of Mexico Production 1.8
Mad Dog Gulf of Mexico Production 1.1
Mad Dog 11 Gulf of Mexico Development 2.4
Trinidad and Tobago Trinidad and Tobago Exploration and Development 1.2
Algeria Algeria Operations 0.3
Trion Gulf of Mexico Development 3.3
Total Oil and Gas Assets 22.1-24.1
Rehabilitation Costs (estimate) 2.6
Total, post rehabilitation 19.5-21.5
Total mid-point 20.5

(1). Range, based on the speed of production decline at the North-West Shelf.

Sure, an open market auction would have taken time and been messy. But the US$7 billion opportunity cost is likely to be justified by the BHP Board as only a few per cent of their market capitalisation (at yesterday’s A$51.33, BHP’s market capitalisation was A$244 billion or around 9.3 per cent of the Australian All Ordinaries Index), so not a big deal.

Also, the BHP shareholders will own 48 per cent of the BHP oil and gas assets/Woodside Petroleum merger (let us call this Woodside Mark 11), so they may enjoy some of the US$7 billion opportunity cost. The real winners of course will be the Woody’s shareholders who retain 52 per cent of Woodside Mark 11.

Paying close to a debt-free US$13.5 billion, together with a theoretical $400 million of synergistic benefits gives Woodside Mark 11 a more diversified production base (and a global top ten position as an independent energy producer), higher liquids mix, many more growth options and a much stronger (combined) balance sheet.

After peaking at $68.66 in May 2008, WPL has been a dog with fleas for the past thirteen years.  With its share price down 70 per cent to $20.73, I’m sure the newly appointed CEO of Woodside Mark 11, Meg O’Neill, would be delighted with this transaction and the value being passed through to the long-suffering Woody’s shareholders.

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Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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