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.
The deal is expected to complete by early August. For that to happen, Woodside would require approval from 75% of its shareholders and a green signal from an independent expert.
Shell's latest move is a part of its larger, ongoing divestment program in which the company has sold non-core assets and slashed its expenditures. Like its peers, such as BP (BP), Shell has been facing pressure from shareholders to increase dividends and buybacks.
Earlier this year, Shell sold its Australian oil refinery and gas stations to the world's biggest independent oil trader, Vitol, for $2.6 billion. Overall, Shell has planned to sell $15 billion of assets globally by the end of next year. So far, the company has sold, or has planned to sell, nearly $12 billion of assets in North America, Nigeria, Europe and Australia.
With cash infusions coming from the asset sales, Shell will be in a better position to reward its shareholders. The company might even increase its divestiture target, considering its rival BP has planned to sell $50 billion of assets.
Shell has reduced its exposure towards Australia but the company's CEO Ben van Beurden has said that it won't change Shell's "view of Australia as an important player on the global energy stage." Shell will continue to play a "central role in the country's energy industry."
By selling its non-core assets in the country, the company will increase its focus on its two massive LNG-focused Australian ventures: Chevron's (CVX) $54 billion Gorgon LNG project in which Shell holds a 25% stake, and the $12.6 billion Prelude Floating-LNG project that is 67.5% owned by Shell. These two represent a combined capacity of more than 18.6 million tons per annum and will drive Shell's LNG production growth. Shell's current global capacity of LNG is 25 million tons per annum.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.