Shell to block trade out of WPL?

Rumours are surfacing once more that Shell is readying itself for a block trade out of its Woodside holding.

With a $7.2 billion stake in the company, making up 23.9% of WPL’s total market capitalisation, a third block trench has been a long time coming (if it eventuates).

The reasons for Shell’s exit are very clear; it doesn’t see the synergies it once did as the ACCC, Federal and West Australian governments have all blocked a full takeover of the company at some point in the last 15 years and shows it will never be able to take it over completely.

It is now coming under other pressures, with geo-political issues arising from WPL’s interest in the Leviathan Project in Israel and Shell’s major projects in the Arab Sea, the Gulf and Saudi Arabia. Questions are being raised from both sides as to how this can work longer term, which is another reason for the rumours that Shell will move out of WPL sooner rather than later.

This would be a good long term price mover from WPL. The Shell overhang has dominated WPL for three years now and most believe a roof is firmly in place at $40-$43 due to Shell being a known seller. If WPL can get clear of the Shell ownership issues several very attractive parts of WPL could start to appear.

The company is looking to rearrange its dividend policy to have a payout ratio of 80%; that would be the largest payout from a cyclical stock listed on the Australian exchange and highly attractive to income investors looking for diversification out of the normal avenues.

The company still has expansion properties, with the James Price Point Browse project still able to go ahead if the project can be signed off under a Floating LNG (FLNG) processing project which would be a perfect complement in the WPL portfolio.

The Pluto North West Shelf project is now up and running with exceptional flow rates, solid offtake agreements and decade long gas bodies. Cash flow and profit should now be a common read from WPL’s fiscal year numbers and should remain so even with increased capex from the possible expansion of Browse as Pluto is a Teir-1 long dated asset.

I see the possible deal being done pre-Christmas. It would mean Shell would need to find a large purchaser or collective purchases and that may delay the sale, however the project quality of WPL’s assets should make this process a formality.

The issue may be the fact that investors looking for a stake that large from an offshore basis will know that it is unlikely to ever get an approval for a full take over. I believe the only company that would get a green light to take over WPL would be BHP and that is unlikely to happen considering they are still integrating the Petrohawk assets.

I would be watching WPL for the Shell news; a block trade of 10% or more will be a medium term positive for WPL. In the ‘gas decade’ it’s perfectly positioned to reap further benefits from the gas markets; a complete clearance of the Shell holding would mean price would no longer be under a roof and normal upside investment can return to WPL.

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