Merging BHP's petroleum assets with Woodside – what shareholders need to know

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One of Australia’s biggest corporate mergers is about to take place. It is the merger of Woodside Petroleum (WPL) with the oil and gas assets of BHP to create a global top 10 independent energy company by production. Here is what shareholders of BHP and Woodside need to know.

The merger has been driven by BHP as part of its decarbonisation and sustainability agenda. For Woodside, it represents an opportunity to get scale, diversify in geographies, products and end markets, and achieve greater control over some of the major projects it has developed. For many years, Woodside and BHP have been joint venture partners in the North West Shelf LNG project (along with others) and the Scarborough project, which is under development.

BHP’s main oil and gas assets are deep water oil wells in the Gulf of Mexico, the Bass Straight oil field (which is a 50/50 venture with Esso), and its joint venture interests in the North West Shelf. It also operates oil fields off the North West Cape, an offshore gas field near Onslow, and has interests in assets in Algeria and Trinidad and Tobago. All of these assets will be transferred to Woodside.

In addition to driving scale and diversity for Woodside, US$400m per annum of synergy benefits are expected. It should also make Woodside more financially resilient. Generally, the market sees that the merger is a “win” for Woodside and while not a “loss” for BHP, its motive is around “ease of exit” rather than gaining a financial advantage. 

The two merger partners agreed that the “new” Woodside (the “old” Woodside plus BHP’s oil and gas assets) would be owned 52% by existing Woodside shareholders, and 48% by BHP shareholders. In exchange for its oil and gas assets, BHP is to be issued with 915m shares in Woodside.

Rather than keep the Woodside shares, BHP has decided to distribute them to its shareholders. (If it kept them, it wouldn’t achieve its decarbonisation and sustainability objectives). The distribution ratio is 1 Woodside share for every 5.534 BHP shares owned. If for example you own 100 BHP shares, you will receive 18 Woodside shares. If you own 500 BHP shares, you receive 90 Woodside share. 1,000 BHP shares and you get 180 Woodside shares.

In an accounting sense, the distribution of shares is being treated as an ‘in-specie’ fully franked dividend. In lieu of a cash dividend payment, you will receive shares. Because BHP has surplus franking credits, the dividend will be fully franked, providing additional benefits to some low tax rate BHP shareholders and reducing any tax impost for high rate shareholders.

How large is the dividend, and what is the tax treatment?

The exact size of the dividend will be determined by the closing price of Woodside shares on the ASX on 31 May, the day before the completion date and the distribution of the shares. On a per share basis, it will be equal to the Woodside share price, divided by the merger ratio of 5.534.

If for example the Woodside share price on 31 May is $32.00, the BHP dividend will be $5.78 per share. It will be fully franked, with franking credits of $2.48 per share.

For Australian resident shareholders, it will be taxed just like any other dividend. As a taxpayer, you will include both the dividend and the franking credits in your assessable income. The franking credits can then be used as a tax offset. 

The net result will depend on your marginal  tax rate. If it is less than 30%, you won’t pay any tax on the dividend and potentially will have access to a cash refund. If your tax rate is higher than 30%, you will have to pay some tax, but at an effectively reduced rate. 

What are the capital gains tax implications?

Because the distribution is being implemented via the payment of a dividend, the “capital” implications are minimal.

There will be no change to the cost base of your BHP shares. If you originally purchased your BHP shares (for say) $30.00, then after the merger, your cost base is still $30.00.

The cost base for your new Woodside shares will be the market value of Woodside shares on 31 May, which on a per share basis, should be 5.534 times the BHP dividend. The acquisition date will be 1 June.

What do Woodside shareholders need to do?

Woodside shareholders don’t need to do anything. 

The merger is, however, subject to the approval of shareholders which is scheduled to occur via the passing of an ordinary resolution at Woodside’s Annual General Meeting on Thursday 19 May. While it is important shareholders exercise their right to vote, it is a “lay down misère” that the resolution will be passed.

What do BHP shareholders need to do?

Unlike Woodside shareholders, BHP shareholders aren’t being asked to approve the merger. So, no action is required.

The only action BHP shareholders may wish to consider is to avail themselves of the ‘small shareholder’ sale facility. This is open to BHP shareholder who own 1,000 BHP shares or less. They can elect to have their new Woodside shares sold on their behalf, free of brokerage or any charges.

If you wish to use this facility, you must apply by Tuesday 24 May.

What is the timetable for the merger?

Key dates are:

• Woodside AGM to approve merger - Thursday 19 May
• Last day BHP shares trade ‘cum’ distribution - Tuesday 24 May
• Small shareholder sale election deadline - Tuesday 24 May
• BHP shares trade ‘ex’ distribution - Wednesday 25 May
• Completion/dividend payment date - Wednesday 1 June
• New Woodside shares trade on the ASX - Thursday 2 June

If you want to buy BHP shares to get the entitlement to the special dividend (and Woodside shares), you will need to do so by Tuesday 24 May. On the next day, BHP shares will trade ‘ex’ the entitlement – meaning that you won’t be eligible. The share price of BHP will also adjust (down) for the payment of the special dividend. 

What do the market analysts say?

The broker market analysts are positive on the merger, and this has been one of the reasons why Woodside’s share price has risen strongly since it was announced .While the share price rise has been mainly driven by a higher oil price, the merger improves Woodside’s asset base and has the potential to improve cash flow and deliver operating synergies.

Going forward, the analysts are less enthusiastic. In the main, they feel that Woodside is fairly fully priced, with a consensus target price (according to FN Arena) of $31.13. In the energy sector, some see better value in Santos (STO).

All prices and analysis at 2 May 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531). This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.