Australia | Nov 09 2010
This story features BHP GROUP LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
By Greg Peel
Anglo-Dutch oil & gas company Shell and BHP Billiton ((BHP)) both made a takeover bid for Australia's oil & gas giant Woodside Petroleum ((WPL)) back in 1985, ending up with 40% each. BHP subsequently sold down to 10% in 1990 and was out by 1994, while Shell sold down to 34.3% in 1994. In 2000, Shell proposed a merger with Woodside which was rejected by the company, and then launched a hostile takeover which was rejected by the government on national interest grounds.
Yesterday, Shell announced the sale of 10% to leave a 24.3% stake. The remaining stake is in twelve-month escrow and can only be sold under a couple of specific conditions, one of them being into a takeover offer.
Press speculation has exploded.
Firing speculation is the recent knock-back of the Canadian government of BHP's takeover attempt of Potash Corp, citing national interest grounds. (See What Chance A BHP Buyback? ). While BHP has been given a month to come back with some sort of concessionary offer, no details were released, and analysts are basically assuming “national interest” is a hard point to concede. In other words, it is now assumed BHP will abandon the bid.
This leaves BHP cashed up and keen but with increasingly few acquisition options. It can't look for acquisitions in the commodities it dominates, such as iron or and coal, given it will run into competition knock-backs all over the globe. Aluminium and nickel do not offer much upside, and copper projects with growth potential are thin on the ground, so that really only leaves oil & gas, which currently represents 40% of BHP's earnings.
The obvious choice, analysts had suggested last week, is for BHP to make a further move into Gulf of Mexico oil which it can do without being too big a fish in the pond. But the Potash bid was all about diversifying the company's revenue base, so does BHP really want more oil? And hence for that matter, does it really want more WA oil and gas projects of which it is involved in plenty of its own?
Take Woodside's make-or-break Pluto LNG project for example. The second Pluto train plan has faced ongoing problems of rising capex and insufficient gas finds. BHP is one of the companies ready to provide feed gas to Woodside for Pluto-2 (and, if ever, Pluto-3) at a price if exploration fails to provide Woodside with enough of its own. BHP also has rather significant capex commitments as well, and one point in taking over Potash is that it is a fully developed production business. Now the suggestion is BHP would want to takeover Woodside altogether instead – the company it bailed out of sixteen years ago – complete with massive but uncertain LNG projects and a constantly rising capex bill.
The suggestion is that such a takeover would not be met with competition arguments given the abundance of companies with an abundance of projects across Australia. And as both are Australian, there's no national interest element. The question, however, is as to whether a BHP bid is as obvious as the press seems to suggest, or not.
BHP isn't the only company capable of making a bid for Woodside, and a national interest argument might be hard to pin on a foreigner given the amount of foreigners already in operation, particularly in the “hot” Carnarvon and Bowen Basins. The government's much lauded Gorgon project, for one, has nothing to do with us. So the next question is as to whether Shell's 10% sell-down signals an opening for a full bid for Woodside, from somewhere.
First of all, let's look it at from Shell's point of view.
Shell sold its stake at an 8% discount to the last closing price and a 5% discount to the 30-day volume-weighted average price. The sale is underwritten and will go to institutions. It is true that instos would need a discount to be interested in size, but why sell to them if supposedly a corporate might be interested in a full takeover?
From Deutsche Bank's point of view, Shell is sending a message to the corporate market. Shell's 34.3% stake was previously seen as an impediment for anyone looking to make a bid for Woodside because it was assumed Shell would try to block. But Shell has now indicated it does not want to keep its Woodside stake any longer. The other 24.3% remains unsold because it is in escrow, but a full takeover could claim it. Shell may have deliberately sacrificed 10% at a discount to sell the other 24.3% at a good premium.
JP Morgan disagrees. JPM suggests that if Shell really wants to exit Woodside it would have simply shopped its stake around. If the market knew it was a seller then it no longer had to worry about any blocking stake. But Shell was ultimately forced to sell 10% at a discount, JPM suggests, because no one else was interested. It now has to wait a year to sell the other 24.3%.
JPM also sees the exit of Woodside by Shell as a positive for Shell shareholders. Shell doesn't need the cash, but it already has minority stakes in Woodside's Browse and Sunrise, 25% of Gorgon, 50% of Queensland CSM LNG with PetroChina, and all of the Prelude floating LNG project. Does it really need Pluto, which has been proving a drag, as well?
If it's good for Shell shareholders, it should, by default, be bad for Woodside shareholders. And Woodside shares have dropped by around 6% today to reflect the discounted sale. But Deutsche sees the sale as good for Woodside shareholders given the above argument of opening up the register.
The two brokers are polarised. Deutsche has a Buy rating on Woodside and is getting ready for a move, perhaps by BHP, while JP Morgan has a Neutral rating, suggesting the market had already factored in a bit of a takeover premium into the Woodside share price and should now be disappointed Shell did not find a suitor.
Fun and games. And the fun and games will likely continue on Thursday, which is when Woodside is due to provide the market with its periodic Pluto update. It is also likely more brokers will weigh into the argument in coming days, if they're not all restricted by being participants in the insto placement.
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