Fast and Furious Wins the Race — The Merger of Woodside Petroleum Ltd

The biggest news in the market this week is the merger of Woodside Petroleum Ltd [ASX:WPL] with BHP’s Petroleum assets.

The biggest news in society this week is the ongoing insanity of our state premiers. Dan Andrews is back out in front in this game. This week, he ordered the shutdown of children’s playgrounds across Melbourne, reimposed curfews, and ordered people to drink their cocktails through a mask — outdoors — in a maniacal attempt to defeat the ‘virus’.

We shouldn’t be surprised at this. After all, this type of behaviour is the logical endpoint for petty dictators who grant themselves state of emergency powers for extended periods. What is surprising is that society has so meekly succumbed to this ‘new normal’.

But enough of the politics today. Let’s talk markets and making money.

Put simply, there are two ways of doing it…fast and slow.

I tend to do it the slow way. Which is where the Woodside/BHP deal comes in. I’ll get to that in a moment.

If you’re in more of a hurry though, there is a faster way to go about it. But it comes with more risk. That’s just the way things work.

To show you what I mean, check this out. Below are the top five performers in the All Ords over the past 12 months.

Vulcan Energy Resources — up 2,173%
Lake Resources — up 1,614%
Sayona Mining — up 1,387%
Venturex Resources — up 826%
Australian Strategic Minerals — up 803%

What do they have in common?

They’re all small-caps. They’re much bigger now after their big runs over the past 12 months, but they all started out as small-cap stocks.

If you want the chance of achieving potentially life-changing gains like this, you’re not going to get it investing in blue chips. Small-caps are where it’s at.

I bring this up because my mates Murray Dawes and Ryan Clarkson-Leward have just released a report on the wonders of small-caps. These guys are the co-editors of our flagship small-cap stock picking service, Australian Small-Cap Investigator.

The amount of technological progress occurring in the world right now is incredible. To be clear, I’m not talking about ‘tech stocks’ here. I’m talking about the ability of technology to disrupt existing industries and create new fields of huge growth.

That’s what Murray and Ryan focus on here. They have identified a number of disparate sectors with significant growth potential. To check out their report, go here.

But if slow and steady is more your pace, stick around. Because I want to discuss the Woodside/BHP deal.

It’s very early days still. It’s not expected to complete for nearly another year. And a number of complex details need to be worked out.

The deal needs a majority of Woodside shareholders to vote for it. It will probably get over the line, but there will be some back and forth between the company and investors.

Let’s run through the basics. Woodside will buy BHP’s gas and petroleum assets for roughly $20 billion. It will pay for it by issuing shares to BHP, for an ownership split of 52% Woodside and 48% BHP.

BHP’s assets include high-quality oil production in the Gulf of Mexico, oil and gas production in Trinidad and Tobago, Bass Strait oil and gas, and Western Australian oil and gas, including stakes in the North West Shelf and Scarborough gas fields, where Woodside already has an interest.

At this stage, it’s difficult to say whether the purchase price is a good one. But on the basic numbers provided, it looks reasonable.

BHP’s petroleum assets generated US$2.3 billion in EBITDA (a cash flow proxy) in FY21. With a purchase price of about $18.5 billion, and assuming an exchange rate of 73 cents to the US dollar, it represents a price-to-cash flow multiple of just under six times.

Throw in US$400 million of annual merger synergies and some long-term growth projects, and the price looks attractive. That’s especially the case considering interest rates are likely to stay close to zero for years to come.

In the short term, it’s unlikely that Woodside’s share price will see much upside though. Firstly, the deal will take a long time to complete. There is a lot of information still to come. Which means right now, there is a lot of uncertainty. Shares rarely perform well in this environment.

In addition to that, when the deal is done, BHP shareholders will own nearly half the company. A decent chunk of these new owners won’t be long-term holders of the stock. They’ll look to get out.

While there will be plenty of new investors attracted to the value on offer, with such a huge amount of shares to change hands, it will take some time for the register to sort itself out.

My conclusion?

If you’re willing to be patient, Woodside should do very well over the next five years.

There is the little question of whether oil and gas prices will be favourable a few years down the track. But I think the predictions around the rise of green energy and the death of traditional energy has been greatly exaggerated. The transition will take decades, not years.

Which means companies like Woodside will help power the global economy for a long time to come.

It may not be as exciting as Murray and Ryan’s small-caps, but it’s not a bad option for a long-term holding.


Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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