August 19, 2021 [WashingtonPost] – Is a barren year for oil industry deal activity finally coming to an end?
ude any time soon, but Aramco’s enthusiasm for a tie-up at any price suggests it’s keen to keep an eye on the situation before it starts to cause problems.
The BHP-Woodside deal isn’t happening on quite such a grand scale. While a combined company would have produced about 649 million oil-equivalent barrels a day in 2019 — enough to put it in the top 30 listed oil producers by volume — Aramco pumps about that amount every hour.
It makes a different sort of sense for the players, though. Every company with assets less spectacular and owners less involved than Aramco has to care about the views of its shareholders and lenders. For BHP, that’s become a problem as the cost of capital for fossil fuel businesses rises and shareholders look to decarbonize their portfolios.
Arch-rival Rio Tinto Group quit its last fossil-fuel assets several years ago and Anglo American Plc sold out of its last thermal coal business in June. While the coking coal used in steelmaking is still a core business for BHP (not to mention iron ore, which can’t be turned into steel using existing commercial technology unless some coal-derived coke is thrown into the mix), selling out of a petroleum business that was always an odd fit for a mining company is a good way to project a cleaner image.
Woodside gets a different sort of benefit. At present it sits toward the lower end of investment grade at major ratings companies, an uncomfortable position at a time when the interest costs on junk energy debt are at a higher premium relative to higher quality bonds than they’ve been in years. By roughly doubling in size, it will get the cashflows and balance sheet to become more self-sufficient in its spending, an important consideration in a market where lenders are increasingly being asked to scrutinize the climate impact of their loan books.
For energy dealmakers looking to expand the fee pool, the signs of green shoots in the energy M&A market will be welcome after a year of drought. Just don’t mistake it for the start of a harvest. With its best years in the past, this field is looking more and more barren.
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