By Kritika Venkat & Akhil V (NYU), Ayushman Nath, Danissa Wan, Jack Wu, Joshua Ooi & Samuel Altass (Cambridge)
Photo: Patrick Hendry (Unsplash)
Overview of the deal
Acquirer: Woodside Petroleum
Target: BHP Petroleum
Total Transaction Size: $13.8 billion
Announcement date: 17 August 2021
Target advisor: Gresham Advisory Partners and Morgan Stanley Australia
Perth-based oil and gas company, Woodside Petroleum, announced to acquire 52% of BHP Petroleum in an all-stock deal for $13.8 billion. Upon completion, Woodside will issue new shares to BHP shareholders. As Woodside struggled to cope with the pandemic, the merger is vital in helping revitalize the Australian company’s dwindling stock price and improve its performance in the energy sector. With the combination of both portfolios, the merger would create the biggest energy company listed on the Australian Stock Exchange and be a global top 10 independent energy company by production. The deal aims to have a high margin oil portfolio, long and sustainable assets that will be resilient to support the accelerating demand for energy, and durable for the transition towards sustainability.
“Merging Woodside with BHP’s oil and gas business delivers a stronger balance sheet, increased cash flow and enduring financial strength to fund planned developments in the near term and new energy sources into the future.” - Woodside CEO and Managing Director Meg O’Neill
Company Details: (Acquirer - Woodside)
Woodside is Australia’s largest natural gas producer, publicly listed on the ASX. The company has exploration activities across Australia, Canada, the US, New Zealand, Myanmar, and other countries. As consumers are becoming more cognizant of environmentally friendly products and energy, Woodside prides itself on serving world-class technology and utilizing green energy to solve future challenges.
Founded in 1954, headquartered in Perth, Australia
CEO: Peter John Coleman
Number of employees: 3300
Market Cap: $14.18 USD (as of 04/09/2021)
EV: $17.83 USD
LTM Revenue: $4.2 bn
LTM EBITDA: $2.35 bn
LTM EV/Revenue: 4.22x
LTM EV/EBITDA: 7.28x
Company Details (Target - BHP Group)
Founded in 1851, the BHP Group is a global resources company involved in commodity production and extraction, primarily in Australia and the Americas. Its main segments are Petroleum, Copper, Iron Ore, and Coal. The Petroleum segment focuses on the exploration and development of Oil and Gas, whereas the Copper segment is engaged in the mining of metals including copper, gold, zinc, and uranium. While BHP has traditionally operated under a Dual Listed Company structure with parent companies in the UK and Australia (BHP Group Limited and BHP Group Plc respectively), it aims to unify this into a single Australian-based company. This new firm will have a primary listing on the ASX, along with further listings on the LSE, JSE, and NYSE.
Founded in 1851, headquartered in Melbourne, Australia
CEO: Mike P. Henry
Number of employees: 31,589
Market Cap: $153.2B (as of 03/09/2021)
LTM Revenue: $60.8B
LTM EBITDA: $36.0B
LTM EV/Revenue: 2.7x
LTM EV/EBITDA: 4.7x
Projections and Assumptions
According to BHP, the merger will have significant synergies by massively upscaling production by both companies – up nearly 200 million barrels of oil equivalent per year. Further, the merger would also increase Woodside's international exposure, with 38 mmboe of BHP's last-12-months production located in the US, Algeria, and Trinidad and Tobago. The merger also intends to diversify both companies’ portfolios of assets. Woodside chief executive, Meg O’ Henry, said that enough credit is not given to BHP’s Gulf of Mexico oil stakes – ”Those are just first-class top-tier assets that will be very cash accretive to the merged company," O'Neill told Reuters. Furthermore, Woodside expects annual synergies of USD400 million from 2023, and rating agencies forecast annual combined fund flow from operation (FFO) generation greater than USD4.5 billion following the merger.
Offloading fossil fuel assets appears to be part of BHP’s longer-term vision, having learned the time-sensitivity of exiting these assets through their delayed sale of thermal coal assets. CEO Mark Henry’s $800 million investment decision into growth options contradicts his public statements that the deal is “not at all” related to BHP’s target to reduce carbon emissions by 30%. Undoubtedly, prioritizing low-carbon activities, due to investor/shareholder pressure, at least partially drives this BHP sell-off and long-term switch to increasing emphasis on its mining function. Market Forces’ proposal for BHP to cut back its oil, gas, and coal production seems to be a significant long-term pressure factor.
This move signals a new era for BHP, with the focus shifting away from fossil fuel assets towards mining materials tied to renewable energy and electrification. Petroleum assets account for a meager 5% of BHP’s annual earnings, and their associated exit from the London Stock Exchange could streamline BHP’s business plan. Moreover, although the global mining industry is expected to continue growing with a CAGR of 7% this decade, renewable energy has a notably higher scope for exponential future growth opportunities.
For Woodside, the deal enables domestic and international expansion. Domestically, acquiring BHP’s petroleum assets enables further oligopolization from an asset base that was originally concentrated only in Western Australia. This solidifies its position as the largest independent oil and gas company in Australia, with 161 of its 199 MMboe (total production during July 2020-2021) coming from Australia. The non-controlling BHP stake of 48% will enable synergies with BHP’s oil and gas assets without inhibiting Woodside’s independence to explore gaining greater ownership through further ventures – such as the Scarborough project.
Risks and Uncertainties
The first risk of the merger arises from the possibility that the merger isn’t approved by shareholders. Although in some M&A deals, shareholder approval is practically a given, this deal has major investors concerned, with Allan Gray Australia (one of Woodside’s biggest investors) quoted by Reuters saying “it’s very unlikely shareholders would jump at that idea. We certainly wouldn’t.” Investors’ somewhat pessimistic attitude to the deal was further reinforced by the immediate fall in share prices of both companies following the announcement - BHP’s share price fell a whole 7%. Therefore, the general negative sentiment to this deal from shareholders on both sides poses the very real risk the deal is rejected come March 2022.
A second risk comes from the finer details of the M&A deal: BHP shareholders will be paid in Woodside stock, giving them a 48% stake in the merged group. However, many environmentally-minded investors (or those who don’t want shares in an Australian company) might be inclined to dump the shares as quickly as possible. This merger was formed as a consequence of BHP’s desire to exit petroleum and look towards “future-facing commodities”: does BHP foresee increasing investor/climate pressure leading to the value of hydrocarbon assets nose-diving in the coming years. Investors are certainly wary that this could be the case - with BHP’s assets (a key selling point of the deal for Woodside) being well past their oil-producing peak in the 1980s. As such, the worst-case scenario for Woodside investors is that they could be left holding soon-worthless assets and therefore liabilities.
Though the deal may seem beneficial in the short term (with an estimated $400 million in cost savings for the merged company through the operations and back-office synergies between BHP and Woodside), the long-term future of the merged company (and the industry) is in grave doubt. Consequently, many analysts believe Woodside’s rationale for this deal banks on taking the short and medium-term profits whilst they can - in the knowledge of the bleak future ahead.