woodside tie-up with bhp makes sense

Woodside tie-up with BHP makes sense

Charlie Aitken | May 26, 2009
Article from: The Australian

THE more I read about the global liquefied natural gas industry the more I get excited about this commodity.

LNG, unlike most commodities other than uranium, is a true clean energy source and the market in LNG seems very well insulated from the global economic meltdown because the vast bulk of it is used for power generation.

The reason I am excited about LNG right now is that the spot market remains a tiny percentage of the global LNG market and you don`t have hedge funds trading around in the LNG market like you do in LME traded commodities.

I continue to read about huge new LNG import and regasification terminals being built in Asia and particularly in China. All of those projects seem to be on track for completion in the next three years or so. I worry that some of the planned LNG liquefaction projects (i.e. where the gas is produced) will be delayed by many years and henceforth there will be a grab for existing LNG production, which will drive up contract prices as people search for LNG to put into these huge new import terminals that are not going to sit idle while project delays continue.

We remain a believer in Gladstone LNG and our preferred two names there remain Santos and Arrow Energy for differing reasons. Clearly we don’t think four hulking LNG production facilities will be built on Curtis Island and even the major players have said four plants should become two.

BG last week announced CNOOC as an off-take partner for their Gladstone plants as well as selling them part of the project. BG and Santos appear to be the most advanced in their Gladstone LNG plans while the other guys seem in no huge rush. The thing that worries me about Gladstone is the timeline and if there is no consolidation there is no way that four plants will be built by 2014-2015 as there will not be enough skilled labour (or pubs!) for them to be built.

This is why Woodside really interests me. I see with their Pluto development that Woodside will be growing their share of LNG production by 144 per cent in the next 18 months from 2.7 mt per annum to 6.6 mt pa via Pluto 1. I also think that the end customers of LNG, be they in China or elsewhere in Asia, need surety of supply and they can’t risk buying the tiny percentage of world LNG trade that is on the spot market, especially if you are a utility company that needs the LNG to fire up generating capacity.

I can see Woodside’s old long-term contract prices being revised significantly higher and the days of selling LNG at $2-$3 a unit to the Japanese are gone in my view.

I also have the view that Woodside fits the bill in terms of Tier 1 assets for BHP Billiton to acquire. I know Woodside has been speculated about before in terms of how a combined BHP/Woodside would look and many consider Shell's 34 per cent holding a blocking stake, but I disagree.

I believe most mega companies like Shell all around the world are conserving cash, cutting back on non-essential capital expenditure and making divestments of non-core assets. Why is a $10 billion holding in WPL a core investment for Shell? They don't control it and the Foreign Investment Review Board knocked back their attempt to buy out the minorities on national interest grounds in 2001, so hence hoping for Shell to take out the minorities seems a long shot. Maybe Shell could reinvest the $10 billion in growing its core business?

If you were BHP why wouldn’t you have a look at Woodside? LNG as a commodity is exactly like the nickel market was before they bid for WMC Resources. The nickel price was just sitting there around $US6-$US7 a pound and clearly BHP had done the work on the supply side knowing the mega projects like Goro were not going to come on and with demand kicking up they could see a sharp move up coming.

Then nickel went from $US8 to $US25 and BHP paid for WMC in 18 months and it was a great acquisition where they now control one of the world's great mineral assets in Olympic Dam.

oodside’s asset base is very similar in my view with huge scale development assets with zero country risk (Australia). Shell could take BHP scrip and could agree to on sell their holdings to local institutions in about five minutes flat, I reckon, as so many are underweight. BHP/Woodside would be around 16 per cent of the ASX 200 and would be a must-own for those underweight.

BHP could then speak for another 16.6 per cent of the North West Shelf and their NW Shelf LNG production would go from 1.9 mt pa to 3.8 mt pa before you even talk about Browse Basin projects or the like which could turn BHP into a 7-8mt pa LNG producer if they owned Woodside. That would be almost as much as the combined LNG that will come out of Gladstone if you assume two rather than four projects go ahead and it's mostly current or near-term production rather than five or six years out.

From a marketing perspective it would be a great commodity for BHP to get bigger in. You could be the world’s leading supplier of clean energy (uranium and LNG) and dirty energy (thermal) coal and hence you are just like a one-stop energy supermarket for the North Asian market, which is clearly the growth market in world energy. LNG isn’t like iron ore where there are fringe players who can ruin the supply side story and the main thing I like is the lack of non-end customers who trade the commodity.

In recent times, the Chinese developers of huge capacity import terminals have been lining up LNG production from various growth projects. In recent weeks CNOOC took 3.6 mt pa from BG for 20 years.

Clearly Petrochina will be next down here as their last deal was 1 mt pa from Gorgon when that comes on line and there is speculation Petrochina did the 2 mt pa off-take in Papua New Guinea the other day. When you look at the above list I would be amazed if Petrochina didn't get involved in Gladstone to fill up some of their supply.

While I am just thinking aloud and I don’t think the deal is even being considered right now, I do believe that BHP with Woodside makes sense on so many different levels. BHP is already partners in big scale projects with Woodside and I am sure BHP might even think it would be better from an operation level than Woodside in operating some of those projects. It would fit the “national champion” role and I am sure Kevin Rudd would like it. Perhaps if nothing ever comes together with Rio, BHP will turn its attention to Woodside. Woodside remains a ''buy'' and a core long-term holding.

Charlie Aitken is Executive Director of Southern Cross Equities More analysis