By Sonali Paul

(Reuters) – Australia’s Woodside Petroleum Ltd shares fell more than 4% on Wednesday in the market’s first verdict on a merger with BHP Group’s petroleum business that will turn it into a global top 10 oil and gas producer.

The deal, announced after the market closed on Tuesday, involves Woodside doubling its share base to acquire BHP’s oil and gas arm in a nil-premium merger to create a roughly A$40 billion ($29 billion) company.

Woodside shareholders will own 52% of the merged group, with BHP shareholders owning 48%.

The merger, expected to be completed in mid-2022, will double Woodside’s output and market capitalisation.

Some analysts praised the deal, saying the share price drop reflected worries about a stock overhang as many BHP shareholders who want out of fossil fuels may dump the shares.

“The price of all this funding headroom is a huge share overhang, which … could leave the better part of A$10 billion of Woodside’s stock to change hands,” CLSA analysts said in a note which maintained an underperform rating on the stock.

“However, we emphasise Woodside 2.0 will be more attractive fundamentally, and our recommendation could become significantly more positive once the market digests the new deal and the new shares,” CLSA said.

Others, however, were more negative.

Fund manager Van Eck Australia questioned the value of the merger and said it may have difficulty winning approval from Woodside shareholders.

“While the merger offers Woodside increased diversification, it is also forcing the company to take on aging oil fields and remediation issues,” said Jamie Hannah, deputy head of investments at fund manager Van Eck Australia.

The shares partly recovered in morning trade to be down 2.1% in a flat broader market. The stock had already fallen 5% since speculation started swirling in July about a potential merger with BHP petroleum involving a huge issue of shares.

Woodside earlier reported a 17% rise in first-half underlying profit on a rebound from last year’s pandemic-hit oil prices, but missed broker forecasts and trimmed its annual production outlook.

Woodside’s underlying net profit rose to $354 million for the six months to June 30 from $303 million a year earlier. That was well short of broker forecasts around $413 million on Visible Alpha.

The company trimmed the top end of its annual production outlook to 93 million barrels of oil equivalent (mmboe) from 95 mmboe, implying a drop of at least 7% from last year’s record output.

Most of the decline is due to falling output at its ageing, mainstay North West Shelf LNG project. Woodside, the operator, will be doubling its stake to one-third of North West Shelf with the BHP merger.

($1 = 1.3782 Australian dollars)

(Reporting by Sonali Paul; Additional reporting by Soumyajit Saha and Shashwat Awasthi in Bengaluru; Editing by Aditya Soni, Stephen Coates and Richard Pullin)

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