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BHP Group (BHP) & Woodside Set to Finalize Petroleum Merger

BHP Group BHP and Woodside Petroleum Ltd recently signed a binding share sale agreement to merge their respective oil and gas portfolios. Woodside will acquire the entire share capital of BHP Petroleum International Pty Ltd (BHP Petroleum) in exchange for new Woodside shares.

BHP has also approved $1.5 billion in capital expenditure for development of the Scarborough upstream project located in the North Carnarvon Basin, Western Australia. The approved sum represents BHP’s 26.5% interest in Phase 1 of the upstream development. Woodside holds the remaining stake and is the operator of the project. Scarborough will be among the lowest carbon incremental sources of LNG to global markets. Notably, if the above-mentioned merger falls through, BHP will have the option to sell its share in the Scarborough Joint Venture.

If completed, the merger will create a global top 10 independent energy company by production and the largest energy company listed on the Australian Securities Exchange. The combined business will have a high margin oil portfolio and long-life LNG assets. Estimated synergies of more than $400 million per annum are expected, via optimizing corporate processes and systems, leveraging combined capabilities and improving capital efficiency on future growth projects and exploration. The combined entity will have a strong growth profile with shared values and focus on sustainable operations. It will also have increased financial resilience, compared to BHP’s and Woodside’s standalone petroleum businesses.

On completion of the merger, Woodside will issue new shares expected to comprise approximately 48% of all Woodside shares as consideration for the acquisition of BHP Petroleum. Completion is targeted for the second quarter of 2022 and is subject to satisfaction of certain regulatory authorities, approval by Woodside shareholders, as well as some other customary conditions.

On Aug 17, in addition to its fiscal 2021 results, BHP had made a flurry of announcements — merger of its Petroleum business with Woodside, approval of $5.7 billion in capital expenditure in Jansen Potash Mine in Canada and its decision to unify its dual-listed structure under its existing Australian parent company to realize simplification and enhanced strategic flexibility benefits. The company intends to focus on commodities (copper, nickel and potash) that will help it capitalize on growing global trends such as decarbonisation, electrification population growth, rising living standards in the developing countries, among others.

BHP reported underlying attributable profit of $17.1 billion in the fiscal 2021, which was up 88% year over year. The company also provided its iron ore production guidance between 249 Mt and 259 Mt, compared with 253.5 Mt produced in fiscal 2021 as Western Australian Iron Ore continues to focus on incremental volume growth through productivity improvements.

Despite these announcements, BHP’s shares have fallen 19.9% so far this year, compared with the industry’s decline of 11.7%.

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Zacks Investment Research

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This was primarily due to the plunge in iron ore prices, which is currently trending at around $85 — close to the lowest since May 2020. Overall, iron ore has lost 32% of its value in a year due to the intensified curbs on steel production in China in its effort to lower carbon emissions. A slowdown across China’s property sector and rising iron ore inventory at China’s ports added to the pressure on prices as well.

This scenario has hurt the share price of iron ore miners like Vale S.A VALE, Rio Tinto plc RIO and Fortescue Metals Group FSUGY as well. Owing to the trend in iron ore prices, shares of VALE, RIO and FSUGY have slumped 32%, 19% and 38%, year to date, respectively.

In sync with its “value over volume” approach Vale has decided to lower its supply of high-silica low-margin products by around 4 Mt in the ongoing quarter, due to weak demand and low prices. The company expects production in 2021 to fall within the lower half of its range 315-335 Mt.

The Zacks Consensus Estimate for Vale’s fiscal 2021 earnings has gone down 31% over the past 60 days. It is currently pegged at $3.94, suggesting growth of 86.7% year over year.

Rio Tinto expects to ship iron ore between 320 Mt and 325 Mt this year, down from the previous range of 325 Mt to 340 Mt as a tighter labor market in Western Australia led to delay in the completion of a new greenfield mine at Gudai-Darri and the Robe Valley brownfield mine replacement project.

The Zacks Consensus Estimate for Rio Tinto’s ongoing fiscal earnings is currently pegged at $13.10, indicating an improvement of 70% year over year. The estimate has gone down 14% over the past 60 days.

Fortescue expects iron ore shipments of 180-185 Mt in fiscal 2022 compared to the record shipment of 182.2 Mt in fiscal 2021.

The Zacks Consensus Estimate for Fortescue’s fiscal 2022 earnings has gone down 44% over the past 60 days to $2.97. It suggests a decline of 55.5% year over year.

BHP, Vale, Rio and Fortescue all currently carry a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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