BHP (ASX:BHP) share price jumps 4% on ‘global energy company’ deal

It seems investors are liking the latest announcement from the Big Australian…

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Shares in resources giant BHP Group Ltd (ASX: BHP) are climbing in afternoon trade and are now swapping hands 4.41% higher at $38.195.

The BHP share price has been lifting today following a company announcement after the close on Monday.

As covered by The Motley Fool earlier today, both BHP and Woodside Petroleum Limited (ASX: WPL) provided an update on their plans to create a global energy company.

BHP also followed up with another announcement on the Scarborough upstream project in Western Australia.

Why are BHP shares crawling higher?

Investors are responding positively to a set of updates provided by BHP on Monday. The first advised that BHP and Woodside will merge their respective oil and gas portfolios.

Further to this announcement, BHP came out with a separate note, advising it had approved US$1.5 billion in capital for phase 1 of the development of the Scarborough project. Final investment decisions have also been made by Woodside and the Scarborough joint venture.

The approved capital expenditure represents BHP’s 26.5% participating interest in Phase 1 of the upstream development. Woodside holds the remaining 73.5% interest and is the operator of the project.

According to BHP, Phase 1 of the project was approved after “a thorough evaluation of its risk and return metrics, including the economics and technical assessment of the integrated project”.

Speaking on the announcement, BHP’s CEO Mike Henry said:

Scarborough will be amongst the lowest carbon incremental sources of LNG to world markets. Scarborough will provide a reliable source of LNG for global customers and secure gas supply for the domestic market, as well as ongoing employment in Western Australia. Scarborough will provide important cash flows and value for shareholders of the enlarged Woodside.

In addition to this development, BHP also holds an option to sell its interests in Scarborough, plus the Thebe and Jupiter projects, to Woodside if the Scarborough merger does not complete.

What else did BHP announce?

Aside from this, as covered by The Motley Fool today, BHP and Woodside confirmed each had signed a binding share sale agreement for the merger of BHP’s oil and gas portfolio with Woodside.

Woodside will acquire the entire share capital of BHP Petroleum International Pty Ltd in exchange for new Woodside shares.

BHP Petroleum will transfer to Woodside on a cash and debt-free basis, based on the balance sheet at the time, including BHP’s legacy assets and liabilities.

When finalised, the merger will result in a global top 10 independent energy company by production and the largest energy company listed on the ASX, according to the announcement.

The combined company will have a high margin oil portfolio, long-life LNG assets, and the financial resilience to help supply and meet energy demand. BHP reckons the deal will deliver substantial value creation for both sets of shareholders from across a range of areas.

Some of these areas include greater scale and diversity of geographies, products, and end markets. The company also foresees estimated synergies of more than US$400 million (100 per cent basis, pre-tax) per annum.

Curiously, the board considered an alternative option to the merger. It considered spinning off its BHP Petroleum asset via distributing shares in a newly-listed entity.

However, while a demerger would result in a financially viable entity, “the board determined that the merger was the best alternative for shareholders given that it would capture the additional value”.

On completion of the merger, Woodside will issue new shares expected to comprise approximately 48% of all its shares, according to the announcement.

BHP says completion is targeted for the second quarter of the 2022 calendar year. Prior to completion, both parties will carry on their respective businesses and try to ensure a smooth transition at the time.

The BHP share price has had a choppy year, up just 3% in the past 12 months. Year to date, it has posted a loss of almost 10% since January 1.

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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