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BHP closer to exiting oil and gas with Woodside merger talks

Shenzi Petroleum development in the Gulf of Mexico. (Image courtesy of BHP.)

BHP (ASX, LON, NYSE: BHP) is in talks over a potential merger of its oil division with Australia’s Woodside Petroleum (ASX: WPL) in a move that would cement the world’s top miner’s exit from the oil and gas industry amid increasing pressure to curb emissions. 

The company confirmed on Monday that a merger with Woodside was one of a number of options being considered as part of a strategic review of its petroleum business. It added that any agreement to combine its oil and gas assets in Australia, North America and Africa with Woodside could result in a distribution of the Perth-based energy group’s shares to BHP shareholders. 

Analysts, who value the division at between $10 billion and $17 billion, said that if BHP shareholders end up with Woodside shares, some would look to sell them on concerns about holding a pure fossil fuel investment. 

Potential merger with Woodside is one of a number of options being considered by BHP as part of a strategic review of its petroleum business

“While discussions between the parties are currently progressing, no agreement has been reached on any such transaction,” BHP said in the statement. “A further announcement will be made as and when appropriate.” 

The acknowledgment follows numerous media reports about a possible deal ahead of BHP’s annual results on Tuesday and Woodside’s half-year results on Wednesday. 

It also follows environmental campaign group Market Forces’ proposal on behalf of about 100 small investors calling on BHP to reduce oil, gas and coal production in line with international targets. 

BHP has said it expects oil and gas demand to remain strong for at least another decade and earlier this month approved $802 million in development spending on oil projects in the US Gulf of Mexico. Such decisions, made just days before a new report that issued dire warnings about human contribution to climate change, have fuelled pressure from some investors. 

The company is aware of the discontent and the fact it may become stuck with assets that would be more difficult to shed as the world attempts to curb consumption of fossil fuels.  

“Petroleum no longer fits within BHP’s portfolio or future-facing strategy. After waiting too long to divest thermal coal, and now having to resort to selling for cents on the dollar, BHP should know it’s better to exit petroleum sooner rather than later,” Credit Suisse analyst Saul Kavonic said in a note. 

“A Think Big Woodside, merged with BHP Petroleum, would present a globally significant LNG weighted company, with a diversity of low-risk geographic exposure and growth options,” Kavonic added. 

Gradual decline 

BHP’s revision of its energy division aims to repeat a 2018 sale of its shale business to BP for about $10.5 billion. The company is also advancing plans to offload its final thermal coal mine and some metallurgical coal operations as part of its commitment to reduce emissions. Those divestments would leave the company with only a handful of fossil fuels assets; a collection of mines in Queensland that supply coal to steelmakers. 

The company’s assets would double Woodside’s annual output to 200 million barrels of oil equivalent. That is almost double the combined volume produced by rivals Santos (ASX: STO) and Oil Search (ASX: OSH), which are in the process of merging their businesses.  

BHP has been in oil and gas since the 1960s. It produced 102.8 million barrels of oil equivalent in the year ending June 30. 

(With files from Reuters)