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Merits for shareholders in Woodside-BHP deal

Lewis Jackson  |  19 Aug 2021Text size  Decrease  Increase  |  
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Australia’s biggest miner is making massive changes in preparation for a decarbonised world but shareholders won’t be left behind, says Morningstar director of equity research Mathew Hodge.

In a flurry of press releases Wednesday, BHP (ASX: BHP) announced it will swap its oil and gas asset for potash, selling the former operation to Woodside Petroleum (ASX: WPL). Alongside the sale, BHP will unify its dual UK and Australia listing onto the ASX and spend billions developing a Canadian mine for potash, a commodity described by chief executive Mike Henry as “future facing”.

Hodge has maintained his BHP Group fair value estimate of $41 pending further evaluation. He expects the oil and gas sale could mean $1 per share in value for BHP’s shareholders, based on Woodside being materially undervalued and $US400 million in savings that the company has flagged.

“Overall, the logic around the merger looks sound,” he says.

“It also aligns with BHP's desire to exit fossil fuels—while ensuring shareholder value is retained.

"Longer-term, we can see a case that the merged entity would be financially stronger and better positioned to unlock the large potential growth within Woodside that we have seen for some time but has yet to be fully realised.”

Morningstar’s Woodside analyst Mark Taylor is also optimistic but maintains his $40 Woodside fair value pending further scrutiny.

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“The deal certainly has merits and Woodside could become even more a master of its own destiny,” he says.

“Woodside shareholders are to end up with 52% interest in a company with more than double the reserves and resources, double the production, an even stronger balance sheet, a clearer path to development, increased asset diversification and retaining majority control of long-life, low-cost assets.”

Woodside shares closed 2% lower on Wednesday, while BHP fell 7%.

Woodside will pay for the assets by issuing new shares that will be passed directly to BHP shareholders, who will own 48% of the new company.

The sale will turn Woodside into one of the world’s ten largest independent energy companies, with assets ranging from Western Australia to the US Gulf of Mexico.

The deal is expected to complete in second quarter 2022, pending shareholder approval.

Fossil fuel exit

BHP also announced it would spend $US5.7 billion to complete its Jansen potash mine in Canada. Potash is a potassium-rich salt mainly used in fertiliser and is an essential nutrient for plant growth.

Chief executive Mike Henry said the Jansen and Woodside decisions would reposition the miner for a world focused on decarbonisation and food security.

“Our petroleum and Jansen decisions will increase the weighting of BHP’s remaining portfolio towards the future facing commodities that are most positively leveraged towards population growth, rising living standards, electrification and decarbonisation,” he said in a press statement Wednesday.

Hodge thinks further investment in Jansen is warranted but cautions that there is a chance returns won’t match capital invested to date.

The miner’s pivot comes as pressure grows on companies exposed to fossil fuels. An August report from the UN’s climate panel (IPCC) said global warming could reach 1.5C in the early 2030s. The goal of the 2015 Paris Climate Agreement was to keep warming below 2C.

For Hodge, the Woodside deal is a good example of how this transition can be managed while protecting shareholder value. Had BHP sold its oil and gas assets on the open market it might not have realised full value, he said.

BHP is continuing with plans to sell its thermal and metallurgical coal assets in Colombia, NSW and Queensland.

Buoyant results

Both Woodside and BHP announced double digit profit growth in their full-year earnings report.

Hodge said the dividend was a “highlight” of BHP’s result. The company declared a record final dividend of US$2 per share, bringing the full year pay-out to US$3.01 per share. This is up from US$1.43 last financial year.

Net profit after tax at BHP nearly doubled to $USD17.1 billion, from US$9.1 the year before, thanks to soaring copper and iron ore prices.

But Hodge says commodity prices are unsustainable, and BHP closed Wednesday at $44.67, a 9% premium to the Morningstar fair value estimate of $41.

At Woodside, profit grew 17% to $US354 million in the first half of the year, marginally beating Taylor’s forecast of $343. Revenue was up 31% as prices rose and the company declared an interim dividend of USD 0.30 cents.

Neither Hodge nor Taylor have factored the merger into their fair value estimate. Both prefer to wait for shareholder approval saying the deal is a way-off and requires further scrutiny.

Woodside closed Wednesday at $19.60, a 50% discount on the fair value estimate of $40.

Coming home

Australia’s biggest miner also announced it would collapse its dual listed structure into a primary listing on the ASX.

BHP is currently dual listed with parent entities in Australia and the United Kingdom. Shares in the UK have long traded at a persistent discount to their Australian counterparts.

The main benefit of the change will flow to UK shareholders should that discount close, says Hodge.

The company says the change will not impact local shareholders or the company’s dividend policies. It will put the proposal to shareholders at a meeting in the first half of 2022.

Consolidation in the oil and gas sector

The BHP and Woodside tie-up comes as rival LNG heavyweight Santos (ASX: STO) agreed terms for a merger with Papua New Guinean oil and gas player Oil Search (ASX: OSH).

Under the 2 August agreement, Oil Search shareholders will receive 0.589 new Santos shares for each Oil Search share held. If approved, they would own 37 per cent of the merged group.

The new entity will be Australia’s largest oil and gas producer, but Woodside still provides better value for investors looking for domestic oil and gas exposure, said Taylor in a special report on the tie up.

The $8.5 billion offer from Santos values Oil Search at $4.02 per share, a modest premium to Taylor’s fair value of $3.90. The Oil Search board intends to unanimously recommend the offer barring a better deal.

The deal comes only two years after Oil Search rejected a $12 billion proposal from Woodside in 2019.

Taylor forecasts a compound annual growth rate for the new entity of 18.1%, with earnings per share lifting to $1.09 by 2030, from the covid-19 lows of $0.20.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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