The Woodside Energy Group Ltd (ASX: WDS) share price is under pressure again on Tuesday.
In morning trade, the energy giant's shares are down 5% to a 52-week low of $25.19.
This follows news that the company is making another major acquisition.
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Woodside share price tumbles on new acquisition
Hot on the heels of announcing the acquisition of Tellurian (NYSE: TELL) last month, Woodside has revealed that it has entered into a binding agreement to acquire 100% of OCI Clean Ammonia and its lower carbon ammonia project in Beaumont, Texas.
According to the release, the two parties have agreed an all-cash consideration of approximately US$2.35 billion (A$3.6 billion).
Woodside notes that the lower carbon ammonia project is currently under construction and the consideration is inclusive of capital expenditure through to completion of the first phase.
The project is located on the US Gulf Coast and can serve customers domestically and internationally. Phase 1 has a design capacity of 1.1 Mtpa and is under construction. The first ammonia production, derived from natural gas, is targeted for 2025.
Lower carbon ammonia production, derived from natural gas paired with carbon sequestration, is targeted for 2026 following commencement of ExxonMobil's (NYSE: XOM) carbon capture and storage (CCS) facility becoming operational.
The acquisition is expected to deliver an internal rate of return above its 10% threshold for new energy projects.
Why this acquisition?
Woodside's CEO, Meg O'Neill, highlights that the deal supports the company's strategy to thrive through the energy transition. She said:
This transaction positions Woodside in the growing lower carbon ammonia market. The potential applications for lower carbon ammonia are in power generation, marine fuels and as an industrial feedstock, as it displaces higher-emitting fuels.
O'Neill also points out that ammonia demand is rising and predicted to double over the next two and a half decades. She adds:
Global ammonia demand is forecast to double by 2050, with lower carbon ammonia making up nearly two-thirds of total demand. This Project exceeds our capital allocation framework targets for new energy projects. Both phases are expected to achieve an internal rate of return above 10 percent and payback of less than 10 years.
The agreement is also going to support Woodside's Scope 3 investment and abatement targets. The CEO explains:
This acquisition is a material step towards delivering our Scope 3 investment and abatement targets. Phase 1 has the capacity to abate 1.6 Mtpa of CO2-e and with the addition of Phase 2 the Project has the capacity to abate 3.2 Mtpa CO2-e, or over 60 percent of our Scope 3 abatement target.
Broker response
The market clearly isn't a fan of the transaction, but Goldman Sachs is cautiously optimistic. Its analysts commented:
The acquisition appears well positioned within WDS' target to invest US$5bn into New Energy projects and target 5 mtpa emissions abatement capacity by 2030 as one of the world's most progressed low carbon ammonia developments with auto thermal reforming to capture 95%+ CO2. However, we expect attention will focus on the balance sheet and impacts to returns after the company's recently announced Driftwood acquisition, ongoing Scarborough capex outlay, and prior expectations for New Energy target investment to be weighted closer to 2030.
Citi isn't a fan of the deal and seems to think that Woodside would be better waiting.
Its analysts feel "the acquisition seems the wrong point in the cycle" and that another good asset could "come along over the next half-decade, potentially during a bear market too."
