BHP’s stunner of a result

The Big Australian also announced an entry into potash and a merger with Woodside.

The Big Australian is getting smaller. Well, kind of.

As well as declaring record EBITDA of US$US$37.4bn, a record final dividend of US$2 per share, and finally taking the plunge into potash by developing its Jansen deposit in Canada, BHP has announced a merger with LNG and oil giant Woodside Petroleum (ASX: WPL).

Merger with Woodside

BHP will sell its oil and gas assets including its Bass Strait interests, its minority interest in Scarborough LNG, and its oil assets in the Gulf of Mexico (Mad Dog, Atlantis, Shenzi) and the Caribbean to Woodside in return for a 48% shareholding in the company. The Woodside shares it receives will then be distributed to BHP shareholders.

If approved, this transaction will double the size of Woodside and put it within the top 10 LNG producers globally. Management is targeting US$400m of cost synergies, and the combined entity will initially have low gearing of 12%.

The merger will provide Woodside with greater scale as well as greater diversity of assets, products and end markets. The combined entity will produce 200mmboe comprising 41mmboe domestic gas, 65mmboe oil and 93mmboe LNG. It will combine high margin oil assets with attractive upside with long-life, low-cost LNG assets and optionality to development opportunities including Scarborough, which should reach FID in calendar 2021. All up, the combination will own 2Bboe of 2P reserves and 8Bboe in 2C resources.

While BHP management has justified the transaction on ESG grounds, in reality demand for oil, gas and LNG isn’t going away any time soon as the world continues to develop and energy demand in the developing world in particular continues to rise. In fact, BHP alludes to this reality in describing the benefits of the merger as enabling BHP shareholders to retain exposure to “the attractive outlook for Petroleum”.

Ironically, with ESG concerns essentially preventing the oil majors such as Shell, Exxon and BP from replacing their reserves, which decline at round 7% per year due to production, ESG proponents are setting the stage for a massive oil price boom.

I think we will see the price of oil rise above US$100 a barrel in the next year or two as the world puts the pandemic behind it and economies rebound from COVID.

Future facing commodities

Elsewhere, the result was dominated by record revenue and earnings in iron ore, with iron ore EBITDA of US$26.3bn. Copper was also impressive, recording EBITDA of US$8.5bn.

Shareholders will receive a record final dividend of US$2.00.

Consistent with management’s focus on “future facing commodities” that will benefit from decarbonisation and electrification, it finally announced the sanctioning of its entry into potash via its Jansen deposit in Canada.

Potash or potassium is used in agriculture to enrich soils that have lost nutrients. With a rising population and improving diets along with a decline in arable land worldwide, demand for potash should keep rising over the next few decades.

While the potash market is currently in oversupply, increased demand and reserve depletion should see the market balance later this decade so with Jansen coming online around 2027 then taking two years to ramp up, it will be in good position to take advantage of the expected change in potash market dynamics.

Jansen is an example of what BHP is all about – concentrating on owning low cost, long-life mines in commodities that have material long-term growth prospects. Jansen has a 100-year operating life and is on the bottom of the cost curve, placing the company in good stead no matter what the future price of potash.

Unification

Rounding out a busy result, BHP will also unify its corporate structure by getting rid of its duel listing structure (BHP Ltd is listed on the ASX while BHP Plc is listed in London) that has existed since BHP merged with Biliton in 2001. Happily, unification wont reduce the unified BHP’s ability to frank dividends.

While BHP is experiencing inflation in costs due to higher energy prices, greater stripping / more material moved, COVID, and price-linked inflation (royalties), its collection of low-cost, long-life mines in iron ore, copper, met coal and eventually potash place it in good stead as the commodities boom continues.

And now with minimal net debt of US$4bn compared to its target of between US$12bn to US$17bn, could a special dividend or buyback be in the offing when it next updates investors in February 2022?

Comments (115)
Lorem ipsum
Lorem ipsum dolor sit amet, consetetur sadipscing elit
Lorem ipsum
Lorem ipsum dolor sit amet, consetetur sadipscing elit Lorem ipsum dolor sit amet, consetetur sadipscing elit

Leave a Reply

Suggested Stories

On top of recent underperformance, the abrupt departure o...

Stonks GuyDec 08, 2021
3 mins read

CEO Mike Henry is creating a simpler, more focussed BHP.

Stonks GuyDec 03, 2021
3 mins read

As well as agreeing to merge with BHP’s oil and gas asset...

Stonks GuyNov 23, 2021
3 mins read

The casino group remains an attractive target, and Blacks...

Stonks GuyNov 19, 2021
3 mins read

Australia’s busiest airport is going private, if the ACCC...

Stonks GuyNov 09, 2021
3 mins read

Cost savings from closing branches and reducing headcount...

Stonks GuyNov 02, 2021
3 mins read