What the Shell sell-down means for Woodside

Shell's long-awaited sale of its stake in Woodside Petroleum removes overhang from the market and will provide Woodside with a way to use its excess balance sheet capacity and leverage returns to shareholders.

Today was a good day for Woodside Petroleum’s Peter Coleman and his chairman Michael Chaney, who have just solved two problems in one $6 billion hit.

Well, actually it’s two hits: a $2.86bn buy-back of 9.5 per cent of Woodside’s capital in tandem with Shell’s sell-down to institutions of another 9.5 per cent that will raise another $3.23bn for the oil and gas major.

It’s a big day for Woodside because for the past 13 years, ever since Peter Costello blocked a $10bn Shell bid for Woodside on national interest grounds, Shell’s stake in Woodside has over-hung the market in its shares.

Shell’s initial sale of a 10 per cent stake in 2010 for $3.3bn only confirmed the status of its remaining 23 per cent shareholding.

After today’s announcements, assuming Woodside shareholders approve a buy-back that would occur at a 14 per cent discount to the market value of their shares and almost 12 per cent below the price paid by the institutions, Shell will be left with only 4.5 per cent of Woodside.

Woodside has made it clear over a long period that it would prefer that Shell offloaded the shareholding and removed the uncertainty that has hung over the market in its shares. Now it has its wish.

The other 'problem' that the buy-back addresses is Woodside’s financial position. It’s too strong!

Cash has been pouring through the group since it completed the Pluto project and sold down some of its exposure to the Browse project to Mitsui and Mitsubishi.

While it has increased its dividend payout ratio and paid a special dividend totalling $520 million last year, that points to a rather large gap in its development program and future growth profile. That question mark over its ability to grow was enlarged when it walked away from the Leviathan LNG project in Israel recently.

Browse was supposed to fill the gap but the massive blow-out in the cost of the proposed onshore processing facility at James Price Point (to an estimated $80bn) has put that project on hold while the partners explore the potential of Shell’s floating LNG technology as a possibly lower-cost and lower-risk approach.

In the circumstances, buying back its own shares at a solid discount to their market price and removing the over-hang from the market is a sensible way to use some of its excess balance sheet capacity and leverage its returns to continuing shareholders.

The sale of all but the residual 4.5 per cent shareholding won’t end a relationship between Shell and Woodside that dates back to the early days of the North West Shelf project, when Shell supplied Woodside’s key executives and its LNG expertise. Both companies remain joint venture partners in the Shelf, as well as the Browse and Sunrise projects.

The Shell sale of most of its Woodside shareholding follows its exit from its downstream businesses in Australia earlier this year, selling them to the Swiss-based energy and commodities trader, Vitol.

Under new chief executive Ben Van Beurden, since the start of this year Shell has accelerated a global asset sale and cost reduction program to try to generate more growth from a more focused portfolio, while seeking to significantly increase its gas production and reserves. It has been investing heavily in its upstream business in Australia in recent years.

Within a program seeking to unlock tens of billions of dollars of capital over the next couple of years, the non-strategic but very valuable Woodside stake would have been an obvious and easy target for a sale and Woodside itself an obvious and willing facilitator.