Shares in BHP Group Ltd. (BHP.AX) and Woodside Petroleum fell on Wednesday as investors digested details of the Perth-based oil and gas group’s A$40 billion ($29 billion) merger with BHP’s petroleum arm, with some questioning the value of the deal for Woodside.
While a 6% fall in BHP’s share price was linked to a decision to end its UK dual listing, where its shares have traditionally traded at a large discount, a fall of up to 4% in Woodside reflected concerns about the expansion, they said.
“It may be difficult to get a vote across the line, with Woodside shareholders likely to question the value of the merger,” said Jamie Hannah, deputy head of investments at Van Eck Australia, a shareholder in both BHP and Woodside.
“Woodside is one of the worst-performing companies within the energy sector globally post-COVID; the company doesn’t yet have a strong mandate to enter a deal of such questionable value and this could further drag on Woodside’s shares,” he said.
BHP agreed to hive off its petroleum business to Woodside in a nil-premium merger, in return for new Woodside shares which will go to BHP shareholders, who will own 48% of the enlarged group.
The deal will make Woodside a top 10 global independent oil and gas producer, giving it oil assets in the Gulf of Mexico, gas in Trinidad and Tobago and ageing assets in Australia’s Bass Strait, while doubling its stake in North West Shelf LNG.
However, it has raised concerns about the strategic sense of expanding in oil and taking on ageing gas assets with big decommissioning costs.
Investors said the fall in Woodside shares was also partly due to worries about an overhang of stock as BHP investors who want to get out of fossil fuels would look to dump the shares.
The stock was down 0.7% in afternoon trade, underperforming local rivals Santos (STO.AX) and Oil Search (OSH.AX), which were both up 1%.
Woodside’s new chief executive, Meg O’Neill, said while investors were very familiar with BHP’s Australian oil and gas assets, they did not appreciate the value of its Gulf of Mexico oil stakes – Mad Dog, Atlantis and Shenzi.
“Those are just first-class top-tier assets that will be very cash accretive to the merged company,” O’Neill told Reuters.
Analysts were more upbeat about the long term, saying the deal would give Woodside more growth options, beyond its $12 billion Scarborough gas project and Pluto LNG expansion, and the company would benefit from strong cash generation at BHP’s debt-free assets.
“It’s a logical deal between the parties,” said Argo Investments portfolio manager Andy Forster. “I do think ultimately shareholders will vote for it.”
Woodside aims to put the deal to a vote in the second quarter of 2022.
Credit Suisse analyst Saul Kavonic said Woodside shareholders may be painted into a corner, noting that, as part of the deal, Woodside gave BHP an option to give up its stake in the Scarborough project for $1 billion if Woodside makes a final investment decision on the project by Dec. 15.
Woodside would then be the sole owner of Scarborough and have to fund the whole project by itself, which it currently cannot afford.
“Shareholders may have little choice but to vote the merger through because it would pose a serious balance sheet overhang,” Kavonic said.
($1 = 1.3770 Australian dollars)
– Reuters