Odinian Beta

With Woodside Petroleum (ASX: WPL) officially confirming that it will merge with BHP’s (ASX: BHP) oil and gas assets – BHP will receive a 48% shareholding in the combined group, which it will immediately distribute to its shareholders – it has also hit go on a couple of large developments.

The company has made a final investment decision to approve the Scarborough and Pluto Train 2 developments, which includes new domestic gas facilities and modifications to Pluto Train 1.

At a cost of US$12bn (Woodside’s share will be $6.9bn) the gas from the Scarborough reservoir will be processed through the existing Pluto LNG facilities by way of the creation of a second train (Pluto Train 2). The first LNG shipment is targeted for customers in Asia in 2026.

Pluto Train 2 production of around 5 million tonnes of LNG per year will add to the existing 3 million tonnes per year of LNG from Pluto Train 1. The facilities will also produce up to 225 terrajoules per day of domestic gas for a minimum of 20 years, with options to extend. Woodside will supply gas to customers in Asia at a very competitive cost of $5.80 per MMBtu.

Of course, the anti-fossil fuel brigade aren’t happy, but the fact remains that demand for LNG and gas isn’t going away for decades.

Moreover, this development will actually assist customers in Asia in switching away from coal – the dirtiest of the fossil fuels in terms of CO2 emissions – to gas so the ESG activists should be happy rather than opposing it. Of course, rationality has never been a feature of the anti-fossil fuel brigade.

Merger with BHP’s oil and gas assets

The merger with BHP’s oil and gas assets, if approved by Woodside shareholders, will create a top 10 independent oil, gas and LNG company globally, with production of 200 million barrels of oil equivalent in 2021.

The Scarborough and Pluto Train 2 developments will only add to this production once complete in 5 years or so.

Source: Woodside Petroleum

Woodside is also aiming for US$400m in cost synergies post merger.

While there are good arguments that Woodside shareholders deserve more than the 52% of the combined group that they will own under the merger, the acquisition of BHP’s oil and gas assets does put the company in good stead to benefit from the bull market in oil, gas and LNG prices.

Demand for oil has recovered quickly from the pandemic-induced downturn to average 99.7 million barrels per day in November, just 1.1 million barrels per day below November 2019. I note that this is despite jet fuel demand still being materially below pre-Covid levels as air travel slowly recovers as lockdowns and border restrictions ease around the world.

Asian economies in particular are projected to grow quickly over coming decades, thereby leading to rising per capita energy demand in these countries as they catch up to Western levels. With supply already restrained, this is bullish for oil, gas and LNG prices in my view.

Even better, the ever-increasing pressure from ESG activists is making it harder for fossil fuel companies to create new supply, further buttressing the bull market in these commodities.

If my thesis is correct, then Woodside shareholders should benefit in coming years.