BHP has confirmed media reports that it is in talks to merge its $20 billion petroleum business with Woodside Petroleum.
Following reports online and in morning newspapers, BHP told the ASX that it has initiated a strategic review of the petroleum business to re-assess its position and long-term strategic fit with the BHP portfolio.
“A number of options are being evaluated. One option is a potential merger of the Petroleum business with Woodside Petroleum and a distribution of Woodside shares to BHP shareholders,” BHP said.
“We confirm that we have been in discussion with Woodside. While discussions between the parties are currently progressing, no agreement has been reached on any such transaction.”
Any deal will change the shape of the Australian oil and gas sector and will be the second massive deal in a month if it happens.
The transaction (which ShareCafe tipped two weeks ago when Santos and Oil Search finalised their $21 billion marriage) will create a mini regional major as Woodside, with BHP Petroleum aboard will be easily the biggest hydrocarbons company on the block in this part of the world.
The media reports said no deal had been reached, but pointed out that BHP’s head of petroleum Geraldine Slattery had arrived in Perth at the weekend. She would be the most logical CEO of any merged company because Woodside’s long time CEO, Peter Coleman left earlier this year and acting CEO, Meg O’Neill is in charge.
BHP has been facing calls to detail how and when it will exit fossil fuels. It has already revealed plans to sell out of thermal coal (mostly based in NSW) and has had the future of the petroleum division under review now for several months as part of its decarbonisation plan that has seen it expand investment in nickel and copper, especially in Australia and South America.
It is also expected to announce the go-ahead of a massive multi-billion-dollar potash mine in Canada, perhaps with the annual results on Tuesday. Potash would replace Petroleum as a new, greener division for BHP to go with metallurgical coal, iron ore, and copper, nickel and gold (and a little uranium).
With iron ore now peaking and set decline as China cuts consumption and forces prices lower, BHP will be under pressure to expand deeper into copper and nickel. it is already planning to boost spending on nickel in WA and it and Rio Tinto have plans to expand the Kennecott copper mining complex in the US. BHP has so far avoided investing in the lithium industry in Australia.
BHP’s decision this month to approve $1 billion in development spending on two oil projects in the US Gulf of Mexico – just days before a new report that issued dire warnings about human contribution to climate change – has only ratcheted up pressure from some investors.
But some analysts see this as ‘clearing the decks’ ahead of any sale because it means there will be no lingering entanglements for BHP should it do a deal with Woodside (or any other buyer). The two projects were the last on its petroleum division’s current development list.
Analysts value BHP’s petroleum business, made up of assets in Australia, the Gulf of Mexico, Trinidad and Tobago and Algeria, at $US10 billion to $US17 billion. The division contributed 5% of BHP’s underlying earnings of $US14.7 billion in the first half to end-December, compared with 70% for iron ore. The share won’t higher for the second half and full year because of the surge in oil and gas prices in the June half – iron ore and especially copper prices also rose strongly in the June half year.
Media reports say Woodside would buy BHP Petroleum in a mixture of shares and a little cash with the shares being passed through to BHP shareholders who would in effect become the biggest group of shareholders in Woodside.
BHP and Woodside are shareholders in the huge Scarborough gas project off the northwest WA coast and a deal like this would increase the chances of this massive development going ahead.
