The merger between Woodside and BHP’s entire petroleum business will see the combined decommissioning costs for the new super independent hit $6.7 billion over the next 30 years, according to Woodside’s prospectus filed to the London Stock Exchange this week.
BHP’s assets will make up 70% of the decommissioning spend and account for $4.5 billion of the total decommissioning costs.
The estimates cover all of Woodside’s assets from its liquefied natural gas (LNG) infrastructure and mature fields offshore Western Australia, to the new US assets and ageing Bass Strait oil fields it will inherit from BHP. However, the forecast does not cover projects yet to be developed, such as the giant Scarborough and Pluto Train 2 LNG development.
Some of the infrastructure in the Bass Strait, operated by ExxonMobil, is over 60 years old, and Woodside faces a looming decommissioning bill for BHP’s share of the legacy assets.
Underscoring the liabilities, Australia’s offshore environment and safety regulator NOPSEMA last year ordered BHP to clean up three offshore fields following years of “limited action” and equipment sinking to the seabed offshore Western Australia. Woodside will soon be responsible for this, assuming the merger proceeds as planned. Woodside shareholders are due to vote on the deal on 19 May.
A recent report from independent expert KPMG, and commissioned by Woodside, valued the combined group at around $40 billion and concluded that the merger is in the best interests of Woodside’s shareholders despite the decommissioning liabilities.
The merger would create a new international super independent built for scale and resilience, with a long-term focus on LNG but exposure in the medium term to high-margin, deepwater oil, according to research firm Wood Mackenzie.
BHP agreed to sell off its petroleum business to Woodside last year in a nil-premium deal that will give BHP shareholders a 48% stake in the combined group and turn Woodside into a top 10 global independent oil and gas producer.
KPMG assessed the value of the combined group at between $37.2 billion and $42.3 billion, equating to a per share valuation of A$26.25 to A$29.81, which was equal to or more than its estimate of Woodside’s current per share value.
KPMG’s valuation of the combined group was below estimates by UBS and Credit Suisse, at about A$34.60 a share and A$33 a share respectively, based on the banks’ current oil price outlooks, reported Reuters.
Woodside-BHP $14.7bn merger deal would create a ‘super independent’
Credit Suisse analyst Saul Kavonic said KPMG’s report did not shine as much light on BHP’s growth prospects as hoped, including significantly underestimating the potential value of its Calypso gas find in Trinidad, said Reuters.
He also said the cashflow profile showed little increase in free cash flow despite Woodside’s Scarborough gas project coming online in 2026, which he said, “may flag risk of decline elsewhere, including at Pluto/Sangomar/North West Shelf”.
KPMG highlighted the strength of the combined balance sheet, with BHP assets being handed over debt-free. This would lower the combined group’s gearing to around 8%, compared with Woodside’s target gearing of 15% to 35%.
“BHP Petroleum’s asset base provides Woodside with immediate access to significant development and growth opportunities, within a time frame that is unlikely to otherwise have been available to Woodside as a standalone entity,” KPMG said.
Woodside reported that it expects to achieve its goal of more than $400 million in cost savings from combining the two groups by early 2024, including cutting executive jobs and other staff, but said carrying out the changes would require one-off costs of up to $600 million in the first two years.
More than A$50 billion ($40.5 billion) of necessary decommissioning work needs to be carried out on Australia’s offshore oil and gas infrastructure, over half of which must be started within the next ten years.
This offers a great opportunity for North Sea decommissioning players to share their experience as Australia aims to be become a world-leading centre for decommissioning.