BHP will wait until about 2030 to fully exit oil and gas, said Tim Gerrard, Janus Henderson Investors’ global natural resources portfolio manager, adding he would be happy to see it divested sooner.
“Our view is that the business detracts from the need to demonstrate a lower carbon footprint and it dilutes their arguments [regarding] sustainability,” he said.
“There is potentially a high opportunity cost of continuing to hold the business and its sale would most probably be seen as a positive by the market.”
BHP’s oil and gas business was “ripe” for either divestment or a revamp through mergers and acquisitions, said Credit Suisse analyst Saul Kavonic, who described the portfolio as “an incoherent mix of disparate assets, especially in Australia”.
Mr Kavonic said Woodside would be the “lead candidate” to buy BHP’s Australian oil and gas business.
BHP and Woodside are already partners in two Western Australian assets and are currently negotiating a final investment decision on their $15 billion Scarborough liquefied natural gas joint venture.
BHP owns a 25 per cent stake in Scarborough, which was expected to be approved last year only for the decision to be deferred to this year because of disruptions relating to the pandemic.
BHP has been trying to sell its 57-year-old Bass Strait oil and gas interests for five years and flagged last August it would likely seek a medium-term exit of its 16.67 per cent stake in WA’s 35-year-old North West Shelf, which counts Woodside as a shareholder.
BHP owns 62.36 per cent of WA’s Pyrenees oil rig and 71.43 per cent of WA’s Macedon gas rig.
“Absent a sale of the Australian petroleum assets – Woodside being lead candidate to buy in our view – Woodside could be a target for BHP to acquire,” Mr Kavonic told clients.
Woodside would not comment on market speculation but a spokeswoman said the company remains “focused on the continued safe execution of our Sangomar project in Senegal and achieving our targeted final investment decision on the Scarborough and Pluto Train 2 developments in Western Australia”.
A combination of BHP and Woodside’s WA assets has long been touted, with former WA Premier Colin Barnett revealing in 2011 that BHP representatives had informally tested his view on a takeover of Perth-based Woodside at a dinner event.
Mr Barnett famously urged acquisitive oil giants to keep their “hands off Woodside” upon opening a major conference in Perth in April of that year.
Renewed speculation that Woodside could acquire more of BHP’s Australian business comes at a time of flux in the Australian oil industry, with Woodside yet to replace former CEO Peter Coleman while Santos courts shareholders in Oil Search over a merger proposal.
BHP is one of very few big miners to own a major oil business, but the company believes its diversified revenue base gives it an “unusual” advantage because other divisions such as iron ore can fund investment in lucrative oil projects at times when low oil prices leave rivals unable to invest, and vice versa.
Mr Gerrard said the oil industry’s capital-intensive nature meant a demerger of BHP’s petroleum division to create a standalone oil and gas company was unlikely to appeal.
“A spin could be problematic given the potential capital requirements of a standalone entity and more importantly financial risk associated with any disaster in the Gulf of Mexico,” he said.
BHP must get the balance right when committing further funds to new oil projects, said Aberdeen Standard investment director Camille Simeon.
“This is a constant debate. Headwinds are intensifying and so maintaining a disciplined capital allocation approach is critical,” she said, when asked if her firm supported the notion of BHP investing more in oil and gas.
“Management understands the risks, and we are constantly stress-testing their assumptions on this,” Ms Simeon said. “The need to balance a number of capital decisions and timing decisions to perfection is incredibly challenging.”