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One point of concern to investors is that BHP may have sold the assets too cheaply and that receiving only Woodside shares in payment is undesirable.
While this is likely to contain some level of truth, investors may be missing out on the wider meaning of the deal that will create a $ 29 billion oil and gas company after all.
It is likely that this deal signals that the era of paying premiums for the purchase of oil and gas assets is over. From now on, companies looking to sell these types of assets will be forced to accept ever-falling prices.
Sydney-listed shares of BHP fell 8.4% in the two days following the deal announcement on August 17, to close at A $ 47.70 ($ 34.44) on Wednesday. Woodside lost 4.2% over the same period to close at A $ 20.29.
The pullback continued in early trading Thursday, with BHP again down 6.2% and Woodside down 2.6%.
There were other reasons for the decline in BHP shares. On the one hand, there is the sustained slump in the spot price of iron ore, the raw material that generates the most income for the largest mining company in the world.
It’s also possible that some investors have tried to take profits after BHP reported its strongest gains since 2012 on Tuesday.
But if some BHP shareholders are feeling downed, perhaps they should consider another asset the Melbourne-based miner is trying to sell.
For more than a year, BHP has been offering its Mount Arthur thermal coal mine in the Australian state of New South Wales for sale. It has not yet found a suitable buyer.
At this stage, BHP could even pay someone to take the mine, the largest in New South Wales, out of their hands, as the company increased the asset’s value on Wednesday from approximately A $ 550 million to a liability. has cut A $ 275 million ($ 198 million), the Sydney Morning Herald reported.
Just seven months ago, the Mount Arthur Mine was valued by BHP at more than A $ 2 billion. The massive depreciation occurred even though the price of Australian steam coal rose to its highest level in 13 years.
The Newcastle Weekly Index, the benchmark price for steam coal, has more than tripled from its low of $ 46.37 per tonne in 2020, hitting $ 168.71 in the week ended Aug. 13, according to the commodity price estimate – Argus reporting agency.
While there is a cost associated with remediation that any buyer would have to bear, the fact that BHP does not appear to be able to find a buyer for Mount Arthur in the best steam coal market since 2008 is illuminating.
Coal resources have become largely toxic, with South32, the company spun off from BHP, ending up paying about $ 250 million to offload its thermal coal mines in South Africa.
OIL AFTER COAL?
While it is not a fait accompli that oil and gas facilities will follow the same path as coal, the risks are increasing.
A renewed focus on mitigating climate change and increasing investor concerns for the environment will make it difficult for oil and gas companies to attract shareholders and capital, even if prices and demand for crude oil, natural gas and liquefied natural gas (LNG) remain strong.
BHP could have exited oil and gas at just the right time. The investment in the Jansen potash project in Canada shows that the company is focusing more on raw materials that will be needed in the future.
However, given its status as the world’s largest exporter of coking coal, the environmentally harmful fuel used to make steel, BHP could still struggle to attract climate-sensitive investors.
While steel is essential to many products that are essential in the world’s transition from fossil fuels to clean energy, the manufacturing process is carbon intensive – and is likely to remain that way for some time.
It remains to be seen whether BHP can argue that coking coal is good for the energy transition, or at least a necessary evil. However, it will likely have to commit to offsetting emissions from burning its coal at a later date. ($ 1 = 1.3862 Australian dollars)
(Adaptation by Kenneth Maxwell)
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