• Tie-up to establish Woodside as a global top 10 independent energy company.
• Will be the largest energy company listed on the ASX worth A$41bn.
• Market sentiment both favourable and unfavourable to merger with BHP.

In a year when the M&A market has been hotter than an Aussie summer, the tie-up between resource titans BHP (ASX:BHP) and Woodside (ASX:WPL) has been a doozy for 2021. 

The all-scrip deal, set to be inked in the 2Q of next year, will establish Woodside as a global top 10 independent energy behemoth by production, and the largest energy company listed on the Australian bourse, worth some A$41 billion.

It nudges Woodside firmly ahead of its closest Australian peer Santos (ASX:STO), which itself is about to merge with Oil Search (ASX:OSH) in a less controversial A$21 billion deal.

Whether or not the Woodside and BHP transaction fuels further M&A in the oil and gas sector remains to be seen.

What is known is that the deal appears to be a polarising one.

Merging BHP’s petroleum assets with Woodside will unlock significant synergies, create scale, and offer shareholders a high margin oil portfolio with longlife LNG exposure.

Some in the market believe the deal is sound as it not only strengthens both companies but allows each to diversify into other areas in the medium and long-term. 

As the merger seeks to include natural gas and other new energy technologies into the portfolio, it could generate an abundance of cash flow to develop new products and low carbon solutions including hydrogen.

However, some in the market such as the Australasian Centre for Corporate Responsibility believe the deal is ‘disastrous’ for both the climate and for shareholders.

The argument is that once completed, the merger will allow Woodside to more than double in size and expand its exposure to the fossil fuel industry.

It has also been touted that there is no way of knowing what number of BHP shareholders will sell and how many will hold Woodside shares.

Like most sectors, energy has a focus on environmental, social, and corporate governance (ESG) investing and BHP’s exit from petroleum has been weighing on Woodside’s share price.

Today, reports said that Woodside will target investments of $US5 billion in emerging new energy this decade but has advised returns will be lower for those projects compared with its traditional oil and gas business.

It will target returns of at least 10% on new energy projects such as hydrogen and a payback within a decade, compared to at least 15% for oil projects, which would have a payback within half that time. 

Woodside’s share price appears a lot less attractive than they were a year ago, which could trigger a selloff moving into 2022.

As it stands, it appears the arguments for and against the BHP and Woodside merger are equal in measure.