Shell to cut stake in Woodside Petroleum to free cash for projects
Europe's largest oil firm to raise US$5 billion as it reduces four-decade holding in Australian company to free up cash for future projects
Royal Dutch Shell, Europe's largest oil company, is selling most of its 23 per cent stake in Woodside Petroleum, raising about US$5 billion in Australia's biggest energy deal.
The sell-down from its almost four-decade-long holding is part of Shell chief executive Ben van Beurden's pledge to accelerate asset sales to free up cash for new projects after taking over from Peter Voser this year. Woodside chief executive Peter Coleman, who scrapped a deal last month to invest as much as US$2.6 billion in an Israeli gas project, said the buy-back would not affect his company's capacity to pursue acquisitions.
"This breaks up an overhang people have been aware of for a long time and allows both companies to move forward with their own strategies," said Tim Schroeders, the portfolio manager at Pengana Capital.
Van Beurden plans to sell about US$15 billion in assets by 2016 and promised earlier this year to slash spending to revive earnings. Shell agreed in February to sell its Australian refinery and gas stations to Vitol Group.
Woodside, whose shares ended on Monday at a three-year high of A$42.85, was halted in Sydney trading yesterday. The Perth-based company, Australia's second-largest energy producer, has a stock market value of A$35.3 billion (HK$257 billion).
BHP Billiton, Malaysia's Petroliam Nasional, or Brazil's Petroleo Brasileiro could be potential suitors for Woodside, said Peter Esho, the managing partner at wealth management firm 100 Doors.
"It's one of the few producers that has a mix of geographical attractiveness, low sovereign risk, developed and proven assets and direct leverage to energy prices," he said.
Shell flagged last year that it would eventually sell its holding in Woodside because it was no longer strategic. Coleman pressed Shell in February to take action on the stake, saying that investors wanted "certainty"."
With a pre-tax sale price of about US$5.7 billion, the Shell deal is bigger than ConocoPhillips's accord in 2008 to make an upfront US$5 billion payment to Origin Energy for 50 per cent of the Sydney-based company's coal-seam gas unit.
The deal will immediately boost earnings, with Woodside estimating a 6 per cent gain, based on 2013 earnings, Morgan Stanley said in a note.
The transactions follow Shell's sale of a 10 per cent stake in Woodside in November 2010 at A$42.23 a share. The stake will drop to a maximum of 4.5 per cent.
Shell's sale will allow shareholders to fully value Woodside, Coleman said on a call with analysts. "We're certainly not thinking about setting the company up for a takeover," he said.
Shell is selling the shares at A$41.35 each, about a 3.5 per cent discount to Monday's close. Woodside also agreed to buy back shares for A$36.49 each, a 15 per cent discount. Citigroup and Goldman Sachs are managing the share sale.
Although the buy-back helps remove uncertainty surrounding Shell's holding, "the upside in Woodside looks unclear", said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein. There is increasing risk that Woodside will turn to mergers and acquisitions with few existing growth options.
Woodside is looking at investments of as much as US$5 billion and expects to move into new regions this year after entering Myanmar, Ireland and New Zealand, Coleman said last month.
"We do have a number of ongoing discussions that are still in their infancy, so we haven't slowed down our business either in exploration or through M&A pursuits one bit," Coleman said.
