Woodside Petroleum (WOPEY) is Australia's second-largest oil and gas producer after BHP Billiton (BHP) and is 23.1% owned by Shell.
Shell is selling 19% of Woodside for nearly $5.7 billion. It has been trying to reduce its stake ever since the Australian government thwarted Shell's takeover attempt more than 10 years ago.
This move means positive things for both companies. Through the asset sale, which is a part of Shell's divestiture program, the company will increase its focus on its two projects in Australia that underpin the future of its liquefied natural gas, or LNG, program while allowing it to reward its shareholders through dividends and buybacks.
Meanwhile, Woodside will be able to grow its earnings per share on the back of this deal. The company's near-term outlook isn't looking bright but an earnings boost might appease Woodside's shareholders.
This year, Shell's A and B American depository receipts have risen by more than 13% each to $80.33 and $84.48, respectively.
Shell will sell 9.5% stake to institutional investors for A$41.35 a share, 3.5% lower than Woodside's Monday's closing price of A$42.85 per share. Woodside will purchase, and cancel, the remaining 9.5% stake for A$36.49.
The discount on sale price reflects Woodside's challenging production growth prospects. The company is not going to invest in the $2.5 billion Leviathan natural gas project in offshore Israel while its Browse gas-export project in Western Australia has been delayed by two years.
On a positive note, by buying back its stock Woodside has said that it will be able to grow its earnings per share by 6%.
Moreover, despite the discount, Shell has been able to benefit from the increase in oil prices coming from the crisis in the Middle East. The fuel prices have gone up by more than 10% this year, which has pushed Woodside's shares 10% higher. The recent sale price of A$41.35 a share looks attractive as it is closer to what the company got more than three years ago when it sold its 10% stake in Woodside for A$42.23 a share.