Source: Intelligent InvestorLast week, Woodside’s takeover of BHP’s petroleum business was unclear; the status of the giant Scarborough gas field was uncertain and many fretted that selling a stake in the infrastructure that would process that gas would be too hard.Within days, Woodside and BHP confirmed their petroleum merger. Woodside found a credible buyer for its infrastructure at Pluto and, crucially, approved the development of the first new LNG project in a decade.At a stroke, the narrative has flipped. Woodside now faces impressive production growth, growing cash flows, and a pristine balance sheet. A week has changed everything.Key PointsA trio of deals transforms WoodsideIt gets more output, cash flow and less debtOil prices could stay elavatedEach of these announcements is significant on its own. Together, they are crucial in determining the future of the business, and it’s worth detailing each.Selling infrastructureAbout 14 years ago, Woodside sanctioned the Pluto LNG project without a big equity partner. It bet the company on building and running a brand new LNG facility from scratch while carrying 90% of the cost and risk.Pluto has been an operational success and delivered seamless volume to Woodside, cementing the business's reputation for operational excellence. Yet it hasn’t matched expectations.The original gas fields supplying the Pluto plant were always considered small and Woodside spent millions looking for more gas to expand the project to a second processing facility (known as a train) to reduce costs.Committing to building a second train at Pluto isn’t just another project, it is a fulfillment of a near two decade long mission.This time, Woodside is bringing a partner to share costs rather than go it alone. Global Infrastructure Partners, an international consortium, will take half of the equity of Pluto-2 for US$3.6bn, soaking up more than half of the upfront cost of construction.The original concept for Pluto, first penned almost 20 years ago, can now be realised: a two-train LNG facility that can produce LNG at a cost of less than US$6 a barrel of oil for 30 years.It is possible because Woodside simultaneously sanctioned the development of the giant Scarborough gas field that will feed the processing plant.Scarborough, fairDiscovered more than 40 years ago, the Scarborough gas field, off the WA coast, has been contested, fought over, neglected and prized.The resource itself is enormous, containing over 11 trillion cubic feet of gas (Tcf), about three times as much as the fields that fed the original Pluto project.Even better, there is little carbon dioxide in the reservoir so it could easily be converted into a carbon neutral project.Once the gas is fed through the processing facility, it will produce 5mtpa of LNG and more than double the current output of Pluto. Woodside’s capital cost of the full project, from pumping gas to building the infrastructure, is expected to be US$6.9bn. That sounds like a lot but it is lower than original expectations and about half the cost of the original Pluto project.For all that expense, Woodside estimates it will generate a 13.5% rate of return – again, higher than the original Pluto return – and underpin 30 years of production. About 60% of output has already been contracted.Sanctioning the largest LNG project in a decade and selling a huge chunk of infrastructure are both big deals, but they aren’t as big as the one Woodside has just confirmed with BHP.It’s onMerging BHP Petroleum and Woodside has been a dream deal for decades. It joins Woodside's Australian LNG projects with BHP’s high-quality offshore oil projects to produce one of the largest energy businesses in the world.The combined entity will produce about 200mboe, more than double Woodside's current output, and significantly more cash flow.BHP’s petroleum business has averaged over US$3bn in operating profits annually over the past five years, holds several interesting expansion options, and comes to Woodside with zero debt.That means Woodside instantly adds billions to earnings without taking on more debt, although it will be issuing a large pool of equity to pay for it all. At the original agreement, Woodside is paying about US$13.5bn for BHP Petroleum. This is significantly cheaper than our estimate of fair value for the division, which sits between US$15-20bn.More details about funding the acquisition are yet to come, but Woodside already thinks it can save about $400m a year from combining projects. The deal satisfies BHP’s desire to exit the energy business and significantly bolsters Woodside's free cash flow and balance sheet. It’s a good outcome for both parties but we think Woodside does better financially from it.With large licks of Woodside equity likely to be issued and BHP shareholders finding they own a dedicated energy business, Woodside’s share price in the short term will be dictated by forces other than fundamentals. That might be an opportunity.With oil prices above US$80 a barrel, sustained falls in capital expenditures and recovering oil demand, Woodside might have pulled off this trifecta of deals at the perfect time.We're bumping our Buy price a little higher, from $22 to $24. Woodside just got a lot better. BUY.
WPL Price at posting:
$21.60 Sentiment: None Disclosure: Held
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