ii view: miner BHP steps closer to $40bn Woodside Petroleum deal

Rejigging its commodity portfolio and with a forecast future dividend yield of over 8%. Buy, sell, or hold?

Update on BHP Petroleum and Woodside merger

ii round-up:

The merger of BHP's (LSE:BHP) petroleum business with fellow Australian oil company Woodside Petroleum (ASX:WPL) to create a $40 billion oil company moved one step closer today. 

Following concerns from some Woodside shareholders, KPMG’s independent review of the deal concluded that it would be in the best interest of Woodside shareholders.

BHP shares rose by more than 2% in UK trading having already gained around a third year-to-date. Shares for rival Anglo American (LSE:AAL) are up by a similar amount during 2022, while Glencore (LSE:GLEN) is up almost two-fifths. The FTSE All World index is down by more than 6% year-to-date, while iron ore, a key BHP mined commodity, has risen by close to a third. 

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BHP announced the potential deal with Woodside in August alongside first-half results. It comes as part of a wider move to rejig its commodity portfolio away from climate change related oil and gas and towards other products such as nickel used in batteries and potash used in farming fertilizer. 

Woodside shareholders are due to vote on the deal on 19 May. Completion is scheduled for 1 June. Subject to voting approval, BHP shareholders are expected to be entitled to one Woodside Share for every 5.5340 BHP shares held. Based on Woodside's share price of US$25.55 at 6 April, the implied value of BHP Petroleum is US$23.4 billion.

Both BHP and Woodside have their primary stock market listings in Australia, with Woodside seeking a secondary listing in London. Earlier this year, BHP moved its primary listing from the UK to Australia, while creating a secondary London listing. The move resulted in BHP, the world’s biggest miner by value, having its shares removed from the UK’s FTSE 100 index.

BHP's first-half results to the end of December, saw it declaring a record interim dividend payment of $1.50 per share, helped by elevated commodity prices as the world emerged from the pandemic. 

BHP’s latest operational update is scheduled for 21 April. 

ii view:

Established in 1851, today BHP is a major diversified mining company operating in more than 90 locations across the world, including Australia, the USA, Canada, Chile, and Brazil. Climate change is now part of its corporate strategy and is assessed under portfolio decisions. 

For investors, exposure to Chinese economic fortunes warrants consideration. China is its biggest customer, generating almost two-thirds of group sales. Relations between the West and China remain strained, with its ties to Russia further complicating matters. Commodity prices are historically volatile while both pandemic and wider economic outlook uncertainty need to be considered.  

On the upside, the potential deal to exit oil and gas operations strengthens its Environmental, Social, and Governance (ESG) credentials. Shareholder returns remain attractive, with the forecast future dividend above 8%, while China and Asia more generally remain expected regions of economic growth. In all, and while some caution remains sensible, income seekers are likely to stay loyal. 

Positives

• Exposure to a diverse portfolio of commodities
• A focus on shareholder returns

Negatives

• Economic and pandemic outlook uncertainty
• Western tensions with major customer China

The average rating of stock market analysts:

Strong hold