Shell Exiting Woodside Opens Door to China Bids: Real M&A

By Angus Whitley and James Paton Dec 15, 2013 9:19 PM PT

1.27%

Royal Dutch Shell Plc’s (RDSA) long-awaited sale of its $6.4 billion stake in Woodside Petroleum Ltd. may open the door for Asian buyers to grab a slice of Australia’s second-largest oil and gas producer, or even the whole company.

Shell, which said last month it was entering “a divestment phase,” may exit its 23 percent holding in Woodside as soon as 2014 as its importance to Europe’s largest oil company fades, said Nomura Holdings Inc. While Shell may opt to sell the stock back to Woodside and institutional investors,China’s Cnooc (883) Ltd. and China Petroleum & Chemical Corp. might pursue the stake or a full takeover, Morningstar Inc. said.

Woodside, which has a market value of $28 billion, offers buyers six of Australia’s seven LNG processing plants as China-led demand for liquefied natural gas is forecast to almost double worldwide by 2030. Government opposition to a foreign takeover may have eased since Shell was blocked in 2001, said E.I.M. Capital Managers Pty. The company also is more affordable after its multiple to cash flow more than halved since 2011, according to data compiled by Bloomberg.

A sale of Shell’s stake in Woodside “opens it up for somebody,” John Robertson, a Melbourne-based investor at E.I.M. Capital who owns shares in Woodside, said in a phone interview. “There’s going to be rising energy demand throughout Asia, particularly in China.”

Not Strategic

Shell, Woodside’s largest shareholder, said last year the asset didn’t fit into The Hague-based company’s long-term plans. Then, in May, Shell Chief Financial Officer Simon Henry said the company “eventually would sell the stake,” describing the investment as “no longer strategic.”

The stake is “increasingly non-core” to Shell as Perth, Australia-based Woodside expands overseas, Theepan Jothilingam, a London-based analyst at Nomura, said in a Dec. 3 report.

Woodside today fell 1.4 percent to A$37.22 at the close in Sydney, trimming this year’s gain to 9.9 percent.

As Shell cuts costs, selling the Woodside stake would free up cash for incoming Chief Executive Officer Ben van Beurden, who replaces Peter Voser in January, said Evan Lucas, Melbourne-based strategist at IG Markets Ltd. Institutional investors, as well as Chinese, Japanese or South Korean companies, may be interested in buying the shares, Lucas said by phone.

Woodside would be “very interesting” to Cnooc, China’s biggest offshore oil and gas producer, and China Petroleum & Chemical, better known as Sinopec (386), said Mark Taylor, an analyst at Morningstar in Sydney. Neither is likely to be blocked by the Australian government, Taylor said.

Source: Woodside Petroleum Ltd. via Bloomberg

Blocked Bid

“Woodside is not the only LNG exporter,” he said in a phone interview. “It doesn’t have the same national significance anymore.”

In April 2001, then-Australian Treasurer Peter Costello blocked Shell’s bid for Woodside. At the time, Woodside ran Australia’s only liquefied natural gas plant and the government was concerned Shell would slow Woodside’s expansion by prioritizing other investments in Asia.

A logical domestic acquirer, Melbourne-based BHP Billiton Ltd. (BHP), the world’s biggest mining company, is now more focused on cutting costs than takeovers, said Taylor.

Kate Gauntlett, a spokeswoman for Woodside, declined to comment on Shell’s stake or potential buyers, and Sarah Bradley, a spokeswoman for Shell, also wouldn’t comment. Michelle Zhang, a spokeswoman for Cnooc, declined to comment. Calls to Sinopec’s Beijing-based spokesman Lv Dapeng weren’t answered during normal business hours.

Profit Growth

Formed in 1954, Woodside (WPL) endured a decade of fruitless exploration in southern Australia before discovering gas off the west coast, according to the company’s website.

Woodside’s Pluto project, which started in 2012, and its North West Shelf development in Western Australia will help boostprofit 14 percent to $2.16 billion next year, according to analysts’estimates compiled by Bloomberg. Woodside plans to expand inIsrael and expects to decide in 2015 whether to develop the Browse LNG project off Western Australia with Shell.

Woodside closed last week at A$37.75 a share, leaving the A$31 billion ($28 billion) company trading at about 8 times its cash flow, according to data compiled by Bloomberg. That’s less than half the figure in April 2011.

Shell already sold 10 percent of Woodside stock for A$42.23 a share in November 2010. The shares haven’t traded higher than A$40 since 2011.

Gas Demand

The price has sagged partly due to expectations of a pending sale by Shell, said Lucas at IG. Should that take place, there would be fresh demand for the stock, he said.

“It makes your big hedge funds wake up to the fact that Woodside is clear,” he said.

Central to Woodside’s appeal to a corporate buyer is rising demand for gas throughout Asia, said Robertson, the fund manager at E.I.M. Capital. Chinese or Japanese energy companies might attempt to buy a stake as a path toward a takeover, a move that may not be opposed by TreasurerJoe Hockey, he said.

“Right now the government is going through some soul-searching about what its view is toward national assets,” Robertson said. “There have been some interesting decisions which throw up the question as to whether the same decision Costello took more than 10 years ago would be taken today.”

Australia ruled this month that China’s state-controlled Yanzhou Coal Mining Co. didn’t need to cut its stake in its Australian business to less than 70 percent, instead allowing it to move toward full ownership.

And even as Hockey blocked Archer-Daniels-Midland Co.’s $2 billion takeover of GrainCorp Ltd. last month, he said he would allow the U.S. company to raise its stake to almost 25 percent to work toward “potentially greater participation.”

Shell is still more likely to sell its Woodside shares to institutional investors or to Woodside itself, said Vincent Pisani, a Melbourne-based analyst at Shaw Stockbroking Ltd.

That may not deter foreign suitors from trying to buy the stake, said Robertson at E.I.M. Capital.

“Someone might say, ‘OK, if we bought the Shell stake, that might be a stepping stone to going the whole way,’” he said.

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