UPDATE 10.15am: Woodside Petroleum has rejected any suggestion its $US2.68 billion buyback of part of Shell’s $US5 billion shareholding will limit its ability to fund a major acquisition.
“We haven’t slowed down our business either in exploration or our M&A one little bit through all this,” Woodside chief executive Peter Coleman said.
“The message is clear: We are generating a lot of free cash and we are committed to growing our business and committed to pursuing all of those opportunities,” he told a media, analysts and investors teleconference this morning.
“This does not in any way affect our capacity to pursue any of those opportunities or complete a transaction if it’s attractive.”
Mr Coleman said the group had “quite a deal” of balance sheet flexibility “over the coming period, however long that may be, to continue to follow organic and non-organic opportunities”.
This included an increased ability to tap debt markets, with Woodside’s gearing level expected to end the year at below 20 per cent, despite the Shell buyback.
Under today’s announcement, Shell is selling down its 23.1 per cent stake in Woodside to just 4.5 per cent through the selective buyback and a separate share sale.
Woodside will buy back 78.3 million of its shares from Shell, representing 9.5 per cent of the company’s issued capital, at a deeply discounted price of $36.49 a share. Woodside shares last traded yesterday at $42.85.
In conjunction with the buyback, which will leave Woodside without a major shareholder for the first time in decades, Shell will sell another 78.3 million shares to institutional shareholders at $41.35 a share.
Shell chief executive Ben van Beurden said the sell-down “is part of our drive to improve Shell’s capital efficiency and to focus our Australia growth in directly-owned assets”.
“It doesn’t change our view of Australia as an important player on the global energy stage, or Shell’s central role in the country’s energy industry,” Mr van Beurden said.
The buyback is subject to shareholder approval and an independent expert’s report declaring the deal is fair and reasonable to Woodside’s non-Shell shareholders.
Mr Coleman and Woodside chairman Michael Chaney said the company had determined that a buyback of 9.5 per cent was “appropriate” after taking into account Woodside’s balance sheet and the capacity of the market.
They added that the company had been “keen” to see Shell reduce its stake to below 5 per cent.
Mr Coleman said the combined transaction would deliver value to Woodside shareholders through increased earnings and dividends per share.
"This combined transaction is an efficient and disciplined use of capital and creates value for all our shareholders," he said.
"In parallel, it allows us to optimise the company’s near-term capital structure, while maintaining the capacity to continue to develop existing projects and make additional investments in new growth opportunities.
"The combined transaction will also increase our liquidity in the market and resolve the uncertainty in relation to Shell’s shareholding that has existed for several years."
The announcement comes after Woodside’s decision last month to abandon plans to take a stake in the large Leviathan gas project in Israel, reinforcing concerns in some quarters about its growth options.
The buyback will go some way to placate impatient Woodside investors hungry for a better return on their investment, with the move expected to provide a fillip for the company’s share price.
The company said it would continue with its practice of an 80 per cent dividend payout ratio for the foreseeable future.
"The transaction is expected to increase the amount of future dividends per share above what they would be in the absence of the transaction," Woodside said.
The buyback will be funded by a combination of cash reserves and debt.
The extraordinary general meeting to vote on the buyback is expected to be held in August.