Western Australian oil and gas giant Woodside Petroleum Limited (ASX: WPL) this morning announced a US$400 million deal to buy half of BHP Billiton Limited's (ASX: BHP) offshore Scarborough LNG assets in WA.
Woodside is cashed up with US$300 million cash in hand as at June 30 2016 and US$1.7 billion in available liquidity in undrawn facilities. Woodside will pay US$250 million on completion of the Scarborough transaction and a further US$150 million "upon a final positive investment decision to develop the Scarborough field."
The fields are estimated to contain 8.7 trillion cubic feet of gas resources, with Woodside's potential net share of the resource estimated at 2.6 trillion cubic feet of gas. The deal will be fully funded with a mixture of cash and debt, with Woodside working alongside BHP and Exxon Mobile to commercialise the assets over time.
Woodside already has significant LNG operations in WA including its flagship North West Shelf project and its secondary Pluto project, while BHP is probably pleased to raise some cash in exchange for getting an expert partner to develop WA LNG fields.
The value of oil and gas assets has crashed over the last two years which means that now is an attractive time for powerful operators like Woodside to potentially snare some bargain acquisitions as companies like BHP seek to raise cash.
Towards the end of 2015 Woodside also made what many considered to be a low-ball takeover offer to gain control of the PNG-based LNG assets of Oil Search Limited (ASX: OSH).
While earlier in 2016 LNG operators Royal Dutch Shell and BG Group completed a US$70 billion mega merger in one of the biggest deals in the history of energy markets. Others have speculated that Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) could reduce their debt piles and improve their outlooks by merging together.
Elsewhere Saudi oil giant Saudi Aramco is reported to be considering going public with a total company value of US$2 trillion to $US3 trillion. According to The Wall Street Journal the IPO alone could generate fees of around $1 billion for investment banks running the deal.
Foolish takeaway
Investors should remember that all of this merger, acquisition and IPO activity in the sector is a symptom of structural change as US shale energy production forces the Saudis into a strategy of flooding the market with supply in an attempt to maintain market share. This fundamental means energy prices are set to remain lower for longer in my opinion, which means energy is a space to avoid for long-term investors.
