Shell to Raise About $5 Billion by Cutting Stake in Woodside

Jun 17, 2014 4:51 am ET

(Updates with Shell share price in sixth paragraph.)

June 17 (Bloomberg) -- Royal Dutch Shell Plc, Europe’s largest oil company, is selling most of its 23 percent stake in Woodside Petroleum Ltd., raising about $5 billion in Australia’s biggest energy deal.

Shell is selling 78.3 million shares to investors, while the Australian company is buying back the same amount of stock from Shell, The Hague-based company said today in a statement. That’s about 19 percent of Woodside, whose attraction as a potential takeover target may be revived.

The sell-down from its almost four-decade long holding is part of Shell Chief Executive Officer Ben van Beurden’s pledge to accelerate asset sales to free up cash for new projects after taking over from Peter Voser this year. Woodside CEO Peter Coleman, who scrapped a deal last month to invest as much as $2.6 billion in an Israeli gas project, said today the buyback won’t affect his company’s capacity to pursue acquisitions.

“This breaks up an overhang people have been aware of for a long time and allows both companies to move forward with their own strategies,” Tim Schroeders, portfolio manager at Pengana Capital Ltd. in Melbourne who helps oversee about A$1.2 billion ($1.1 billion), said today by phone.

Van Beurden plans to dispose of about $15 billion in assets through 2015 and promised earlier this year to slash spending to revive earnings. Shell agreed in February to sell its Australian refinery and gas stations to Vitol Group.

Shell shares traded little changed, down 1 penny at 2,378 pence in at 9:49 a.m. in London today. The stock has gained 9.9 percent so far this year.

Sovereign Risk

Woodside, which closed yesterday at a three-year high of A$42.85 a share, was halted in Sydney trading. The Perth-based company, Australia’s second-largest energy producer, has a stock market value of about A$35.3 billion.

BHP Billiton Ltd., Malaysia’s Petroliam Nasional Bhd., or Brazil’s Petroleo Brasileiro SA could all be potential suitors for Woodside, Peter Esho, managing partner at wealth management firm 100 Doors, said by phone from Sydney.

“It’s one of the few producers that has a mix of geographical attractiveness, low sovereign risk, developed and proven assets and direct leverage to energy prices,” he said.

Shell flagged last year that it would eventually sell its holding in Woodside because it was no longer strategic. Coleman pressed Shell in an interview in February to take action on the stake, saying that investors wanted “certainty.”

Boost Earnings

With a pre-tax sale price of about $5.7 billion, the Shell deal is bigger than ConocoPhillips’s accord in 2008 to make an up-front $5 billion payment to Origin Energy Ltd. for 50 percent of the Sydney-based company’s coal-seam gas unit.

The deal will immediately boost earnings, with Woodside estimating a 6 percent gain, based on 2013 earnings, Morgan Stanley said today in a note. Still, it “does nothing to address growth in oil and gas assets,” according to the note.

The transactions follow Shell’s sale of a 10 percent stake in Woodside in November 2010 at A$42.23 a share. The stake will drop to a maximum of 4.5 percent.

Shell’s sale will allow shareholders to fully value Woodside, Coleman said today on a call with analysts. “We’re certainly not thinking about setting the company up for a takeover,” he said.

Shell is selling the shares at A$41.35 each, about a 3.5 percent discount to yesterday’s close. Woodside also agreed to buy back shares for A$36.49 each, a 15 percent discount.

Citigroup Inc. and Goldman Sachs Group Inc. are managing the share sale.

M&A Risk

Although the buyback helps remove uncertainty surrounding Shell’s holding, “the upside in Woodside looks unclear,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said today in a note. There’s increasing risk that Woodside will turn to M&A with few existing growth options, according to the report.

Woodside is looking at investments of as much as $5 billion and expects to move into new regions this year after entering Myanmar, Ireland and New Zealand, Coleman told reporters in Sydney last month.

“We do have a number of ongoing discussions that are still in their infancy, so we haven’t slowed down our business either in exploration or through M&A pursuits one bit,” Coleman said today.

In 2001, the Australian government blocked Shell’s takeover bid for Woodside. At the time, Woodside ran Australia’s only LNG plant and the government was concerned Shell would slow Woodside’s expansion by prioritizing other investments in Asia.

--With assistance from Brett Foley in Melbourne and David Fickling in Sydney.