BHP Petroleum and Woodside Petroleum have consolidated their oil and gas portfolios in a merger that’s set to create one of the largest independent energy companies globally.
The oil and gas industry is seeing a significant shake-up in 2021 with merger and acquisition (M&A) deals impacting major Australian-based companies.
Fresh off Santos and Oil Search announcing their intentions to join forces, BHP and Woodside have merged their entire petroleum businesses, with 52 per cent owned by existing Woodside shareholders and 48 per cent owned by existing BHP shareholders.
The move set up the creation of a global top 10 independent energy company based in Australia valued at around $40 billion, with BHP looking to streamline its resources portfolio to achieve net-zero emissions in the coming decades.
“Having made the decision to separate these parts of our business, we believe a merger of BHP Petroleum with Woodside delivers the most value for shareholders,” BHP chief executive officer Mike Henry, speaking during an August 2021 earnings call, says.
“Oil and gas provide more than half of the world’s primary energy today. They remain essential to the processes and products that support everyday life.
“And high-quality assets and projects are expected to continue to generate attractive returns for the next decade and likely beyond.
“The question is not whether these resources have a role, but rather how to position them to deliver the best shareholder and societal outcomes during the energy transition and today’s announcement will achieve that.”
The merged company is expected to deliver around 200 million barrels of oil equivalent per year.
Under the merger, Woodside would consolidate BHP’s oil operations in the Gulf of Mexico, including its Shenzi North project, which it committed $US544 million ($740.6 million) in capital to in August.
Woodside and BHP have signed off on phase one of the $US12 billion ($16.5 billion) Scarborough upstream project in the North Carnarvon Basin as the merger takes its first strides.
The merged entity will aim to produce eight million tonnes of LNG per annum from the facility, with first cargo expected in 2026.
On the mining side, BHP has been working towards it net-zero emissions goal across its global operations.
Katana Asset Management portfolio manager Romano Sala Tenna says the merger will allow BHP to streamline its portfolio.
“From BHP shareholders point of view, it’s an absolute no-brainer,” he tells Australian Resources & Investment.
“It is a good transaction because it enables them to act out their ESG (environmental, social and governance) preferences in a way it enables them to get benefits from the assets, but also to weight up or down, or neutral, according to how they see the ESG issues related to LNG (liquefied natural gas) and petroleum.
“From a BHP corporate point of view, it is a brave transaction because this is second biggest pillar through the cycle and they’ve effectively decided to pass this off and pivot to new world metals, as opposed to the alternative (which) would have been to use cash flows and margins from these assets to fund that pivot over a more gradual timeframe.”
The move to new world commodities was shown when BHP committed $US5.7 billion to fund its Jansen stage one potash project in Canada in August, an investment Henry says is part of a strategy of growing the company’s exposure to “future facing commodities”.
Copper is also expected to play a key part in the world’s clean energy technology revolution due to its importance in the manufacturing process of technologies such as electric vehicles.
For BHP, its Escondida mine in Chile and Olympic Dam mine in South Australia will be central to meet growing demand for the base metal.
Sala Tenna says oil and gas companies are likely to push for the lower carbon emissions from the energy source compared with coal.
“What we’re just starting to see is the first signs of companies such as Woodside fighting back in terms of explaining first that all oils aren’t oils,” he says.
“LNG is substantially cleaner burning than coal, it can be turned on and off with the flick of a switch, so it works perfectly with renewables.
“The big players will start to push out and get better investor relations in place, to understand the role it has to play and also they’ll then be able to distinguish between LNG and bitumen grade crude.”
BHP has high hopes for LNG demand in the future. Longer term, the company expects the commodity to offer a combination of systematic base decline and an attractive demand trajectory, with new supply likely to be required to balance the market in the middle of this decade, or slightly later.
“However, gas resource is currently abundant and liquefaction infrastructure comes with large upfront costs and extended pay backs,” the company’s 2021 annual report states.
“Within global gas, LNG is expected to gain share. Against this backdrop, LNG assets advantaged by their proximity to existing infrastructure or customers, or both, in addition to being at the lower end of the emissions intensity curve, are expected to remain attractive.”
Wood Mackenzie research director Andrew Harwood says the M&A activity in the oil and gas sector demonstrates a commitment to long-term sustainable operations amid the clean energy boom.
“An exit from its petroleum business has been long rumoured for BHP, and as it faces rising pressure from the energy transition, it would seem that the mining conglomerate has determined now to be the optimum moment to achieve maximum value,” Harwood says.
“Following hot on the heels of Santos’ proposed merger with Oil Search, a Woodside-BHP combination is further evidence of oil and gas operators seeking solace from longer term uncertainty through scale, and doubling down on long-term, cash-generative, resilient resource themes.
“Strong cash flow from BHP’s (Gulf of Mexico) assets over the next decade will provide steady shareholder returns while supporting planned investment across the wider business in LNG growth and new energy opportunities.”
BHP earned $US3.9 billion in revenue during the 2020-21 financial year from its petroleum business, which was lower than the $US4.07 billion in the year prior.
Woodside also expects to benefit from the merger with BHP by doubling its production and strengthening its position to deliver shareholder returns.
As Australia’s largest natural gas producer, Woodside will also capitalise on BHP’s LNG assets globally.
BHP and Woodside are expecting annual synergies of $US400 million to arise from the merger, including an optimisation of corporate processes, supporting the petroleum capabilities of both companies, optimising exploration expenditure and greater financial resilience.
The two companies are expecting to reel in more than $US8 billion in revenue as part of the merger.
“Put simply, BHP’s global petroleum business has merged with Woodside, creating a larger, more resilient Woodside with the financial strength to fund growth and thrive through the energy transition,” Woodside chairman Richard Goyder says.
“The Woodside board believes this will be positive for all our stakeholders as it brings together our complementary assets and capabilities, which will provide a strong base to deliver enduring shareholder returns.
“Importantly, Woodside’s existing emissions reduction targets to reduce net emissions by 15 per cent by 2025 and 30 per cent by 2030 will be extended to the enlarged portfolio.”
While its petroleum outlook does not factor in its merger with Woodside, BHP forecasts between 99 and 106 million barrels of oil equivalent in the 2021-22 financial year, with petroleum exploration expenditure within the 2021-22 financial year expected to be around $US2.3 billion.
Sala Tenna believes analysts would not have expected BHP to merge with Woodside 12 to 18 months ago, but the rapid movement of ESG requirements has accelerated the company’s focus on metals used in clean energy.
According to BHP chair Ken MacKenzie, this focus consolidates the company’s strategic and climate goals.
“Investing in future facing commodities creates great opportunities for BHP – it means our strategic goals align with our climate goals – but it also creates a challenge,” MacKenzie says in BHP’s annual report.
“The world needs to increase production of commodities that support the transition and do so ever more sustainably.
“BHP has made progress against our greenhouse gas emissions reductions targets and goals, but we intend to continue to challenge ourselves to reduce our own emissions, and work in partnership with our customers and suppliers to reduce emissions along the value chain.”
Despite its focus on ESG requirements and decarbonisation, BHP has remained committed to its energy coal assets, including the Mt Arthur coal mine in New South Wales.
BHP anticipates uncertainty from ongoing tensions between Australia and China, yet expects coal will continue to be used for decades to come.
“I think the ESG landscape has moved very rapidly and BHP has made the decision to be at the forefront of that,” Sala Tenna says. “From a Woodside perspective, it’s a very good transaction.
“Woodside has issued in the vicinity of one billion shares that means there are a per cent of people who get those shares with BHP will sell so that’s going to create a short to medium term overhang in the marketplace
“But medium to longer term, this is a very good transaction for Woodside. It removes all their funding uncertainty through the cashflow that comes out of these assets.”
The merger is expected to be finalised during the second quarter of 2022.
This article appeared in the November issue of Australian Resources & Investment.