BHP Billiton has, perhaps temporarily, doused the flames of expectation that it was about to mount a $46 billion bid for Woodside Petroleum. Whether or not BHP Billiton has ambitions to eventually own Woodside, with Shell holding a 24% stake in the big LNG group that doesn’t fit within its strategies, sooner or later there is going to be a restructuring of Woodside’s ownership.
The latest flare-up in what has been months of speculation of a BHP Billiton move on Woodside was provided by UK reports that BHP was in talks with Shell about acquiring its 24% interest in Woodside as a precursor to a bid and that the discussions included the prospect of BHP Billiton selling direct interests in some offshore LNG projects to Shell as part of the deal.
BHP Billiton said today the market was fully informed and it wasn’t aware of any basis for the speculation. To reinforce the point it said it was not relying on the confidentiality exception within the continuous disclosure regime.
There is logic, if not current fact, to the speculation. Ever since Shell off-loaded a 10% interest in Woodside last November, raising $3.34 billion in the process, it has been apparent that the remaining 24% stake is non-strategic.
As part of a strategy of increasing its LNG capacity by 20% by 2015 Shell expects to spend more than $30 billion in Australia over this decade — potentially much more — and is clearly pursuing direct interests in projects and their output.
As recently as the weekend Shell agreed to buy a 6.4% interest in Chevron’s giant Wheatstone project’s facilities and an 8% participating interest in the Wheatstone and Iago fields offshore north-western Australia.
The ratcheting up of its ambitious and preference for direct interests in projects means its residual stake in Woodside, worth about $9 billion, is superfluous to its requirements. It was inevitable from the moment Shell reduced its shareholding in November that it, too, will be sold.
BHP Billiton has long been interested in Woodside and the massive exposure to LNG that it has. In fact, in 2001, when Shell’s bid for Woodside was blocked by Peter Costello on national interest grounds, BHP Billiton actively explored a merger of its petroleum business with Woodside.
Setting aside the issue of value — Woodside wouldn’t come cheaply and Marius Kloppers can’t afford to be seen to over-pay (and indeed has demonstrated discipline on value) — there is strategic sense to a BHP Billiton bid.
After the failure of its attempts to acquire Rio Tinto and Potash Corp, BHP Billiton knows that oil and gas is probably the only segment of its portfolio that could be expanded by a major acquisition without inciting political and/or regulatory opposition and where there are targets with assets that fit its own criteria. It also knows that its next bid has to succeed or its own management and direction will be placed under acute pressure.
As an Australian-headquartered company, with an Australian chairman and a majority of local non-executive directors, the prospect of federal political intervention to block a bid for Woodside would be low.
BHP Billiton also knows after its previous experiences that any big bid has to be friendly — it needs a target company endorsement that would also help reduce the risk of political opposition (with the exception of Western Australian premier Colin Barnett, who is opposed to a Woodside takeover).
Barnett, incidentally, has disclosed that he was sounded out some time ago about his attitude to a BHP Billiton takeover of Woodside, which provides some credibility to the speculation. BHP Billiton would, however, be keeping an open file and taking soundings on several potential deals all the time. That could also explain any discussions between BHP Billiton and Shell — BHP Billiton would want to know the status of the stake regardless of whether it had any immediate ambition to acquire Woodside.
While an agreed deal is almost a necessity for BHP Billiton, the price of support from an aggressively independent Woodside would be expensive and the synergies from an acquisition, while potentially material, wouldn’t justify paying an over-the-top price to secure that support.
Woodside, of course, has also been well aware since November that the remaining Shell stake destabilises its register and jeopardises its independence. It may make an attempt to take that holding out of circulation itself.
There are two obvious approaches for Woodside to pursue. Its balance sheet is already stretched by the number of very large projects in has under development so it can’t simply buy back the shares and cancel them.
What it could do is kill two birds with the one stone and swap a direct interest in one or more of its projects for the shareholding, in the process reducing its funding task to more manageable proportions.
Or else it could find buyers for the shares — the two Japanese partners in the North West Shelf project, Mitsubishi and Mitsui, would be obvious candidates and there has been speculation that they might take the holding off Shell’s hands.
Given Japan has relied on nuclear power for about 35% of its energy requirements, the recent series of natural disasters and their horrific legacy ought to lead to an urgent effort by Japan to secure additional non-nuclear sources of energy. LNG is the obvious one.
That change in the regional LNG demand outlook — in a market that is expected to be short of supply towards the end of the decade — would also, of course, validate a value for Woodside that might otherwise appear too high.
*This article first appeared on Business Spectator.