Thursday, 19 August 2021 — Wollongong, Australia

By Greg Canavan Editor, The Rum Rebellion

[6 min read]

Dear Reader,

The biggest news in the market this week is the merger of Woodside Petroleum Ltd [ASX:WPL] with BHP’s Petroleum assets.

The biggest news in society this week is the ongoing insanity of our state premiers. Dan Andrews is back out in front in this game. This week, he ordered the shutdown of children’s playgrounds across Melbourne, reimposed curfews, and ordered people to drink their cocktails through a mask — outdoors — in a maniacal attempt to defeat the ‘virus’.

We shouldn’t be surprised at this. After all, this type of behaviour is the logical endpoint for petty dictators who grant themselves state of emergency powers for extended periods. What is surprising is that society has so meekly succumbed to this ‘new normal’.

But enough of the politics today. Let’s talk markets and making money.

Put simply, there are two ways of doing it…fast and slow.

I tend to do it the slow way. Which is where the Woodside/BHP deal comes in. I’ll get to that in a moment.

If you’re in more of a hurry though, there is a faster way to go about it. But it comes with more risk. That’s just the way things work.

To show you what I mean, check this out. Below are the top five performers in the All Ords over the past 12 months.

Vulcan Energy Resources — up 2,173%
Lake Resources — up 1,614%
Sayona Mining — up 1,387%
Venturex Resources — up 826%
Australian Strategic Minerals — up 803%

What do they have in common?

They’re all small-caps. They’re much bigger now after their big runs over the past 12 months, but they all started out as small-cap stocks.

If you want the chance of achieving potentially life-changing gains like this, you’re not going to get it investing in blue chips. Small-caps are where it’s at.

I bring this up because my mates Murray Dawes and Ryan Clarkson-Leward have just released a report on the wonders of small-caps. These guys are the co-editors of our flagship small-cap stock picking service, Australian Small-Cap Investigator.

The amount of technological progress occurring in the world right now is incredible. To be clear, I’m not talking about ‘tech stocks’ here. I’m talking about the ability of technology to disrupt existing industries and create new fields of huge growth.

That’s what Murray and Ryan focus on here. They have identified a number of disparate sectors with significant growth potential. To check out their report, go here. 

But if slow and steady is more your pace, stick around. Because I want to discuss the Woodside/BHP deal.

It’s very early days still. It’s not expected to complete for nearly another year. And a number of complex details need to be worked out.

The deal needs a majority of Woodside shareholders to vote for it. It will probably get over the line, but there will be some back and forth between the company and investors.

Let’s run through the basics. Woodside will buy BHP’s gas and petroleum assets for roughly $20 billion. It will pay for it by issuing shares to BHP, for an ownership split of 52% Woodside and 48% BHP.

BHP’s assets include high-quality oil production in the Gulf of Mexico, oil and gas production in Trinidad and Tobago, Bass Strait oil and gas, and Western Australian oil and gas, including stakes in the North West Shelf and Scarborough gas fields, where Woodside already has an interest.

At this stage, it’s difficult to say whether the purchase price is a good one. But on the basic numbers provided, it looks reasonable.

BHP’s petroleum assets generated US$2.3 billion in EBITDA (a cash flow proxy) in FY21. With a purchase price of about $18.5 billion, and assuming an exchange rate of 73 cents to the US dollar, it represents a price-to-cash flow multiple of just under six times.

Throw in US$400 million of annual merger synergies and some long-term growth projects, and the price looks attractive. That’s especially the case considering interest rates are likely to stay close to zero for years to come.

In the short term, it’s unlikely that Woodside’s share price will see much upside though. Firstly, the deal will take a long time to complete. There is a lot of information still to come. Which means right now, there is a lot of uncertainty. Shares rarely perform well in this environment.

In addition to that, when the deal is done, BHP shareholders will own nearly half the company. A decent chunk of these new owners won’t be long-term holders of the stock. They’ll look to get out.

While there will be plenty of new investors attracted to the value on offer, with such a huge amount of shares to change hands, it will take some time for the register to sort itself out.

My conclusion?

If you’re willing to be patient, Woodside should do very well over the next five years.

There is the little question of whether oil and gas prices will be favourable a few years down the track. But I think the predictions around the rise of green energy and the death of traditional energy has been greatly exaggerated. The transition will take decades, not years.

Which means companies like Woodside will help power the global economy for a long time to come.  

It may not be as exciting as Murray and Ryan’s small-caps, but it’s not a bad option for a long-term holding.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

By Bill Bonner Editor, The Rum Rebellion

POITOU, FRANCE

The financial news this week is overshadowed by the disgraceful fall of Kabul. 

On 8 July, President Biden said a Taliban takeover was ‘highly unlikely’, adding that there would be ‘no circumstance [where] you see people being lifted off the roof of an embassy.’

And even if the Taliban did eventually take over, said US Secretary of State Antony Blinken in June, it won’t ‘be something that happens from a Friday to a Monday.’

But that’s exactly what did happen. The Afghan troops that the US trained, bribed, and supported for 20 years didn’t fight to the last man…they simply dropped their guns and joined the other side.

Incompetent and unreliable

In all of military history, we can’t think of any defeat so quick…so complete…or so ignominious.

Biden and Blinken were advised and informed by 17 different ‘intelligence’ agencies — the CIA, the NSA, etc — with billion-dollar budgets, thousands of big-head analysts, and all the latest spy technology. 

How could they all be so incompetent?

Journalist Glenn Greenwald reports that the Pentagon had long reported that the Afghan army, which outnumbered the Taliban four to one, was both incompetent and unreliable.

They didn’t make a ‘mistake’ said Greenwald, interviewed on Fox News by Tucker Carlson this morning, ‘they lied.’

So add Biden, Blinken, and a few spook chiefs to the gallows list. Hang ‘em high as a warning to the others.

Corruption and conflict

But today, we wonder: What else are they lying about?

COVID-19 vaccines? Inflation? The economy? The green agenda? 

Yes, dear reader, it’s amazing what you can’t see when you’re paid to be blind. And for a long time — 20 years, in the case of Afghanistan — you can keep the fantasy intact. 

Then, in just a few days, it collapses like a punctured balloon.

Anyone could have foreseen the whole 20-year fiasco…all they had to do was read about Afghanistan on Wikipedia. 

The country was invented by Europeans. But it is inhabited by dozens of different tribes — Pashtun, Tajik, Hazara, Uzbek, Aimaq, Turkmen, Baloch, Pashai, Nuristani, Gujjar, Arab, Brahui, Qizilbash, Pamiri, Kyrgyz, Sadat — each with its own language, religion, culture…and deep grudges against the others.

Building a US-style democracy was preposterous from the get-go. But who wanted to see that…when there was US$2 trillion to be made by pretending not to see it?

The generals got their stars…their post-retirement sinecures at Raytheon…and their shares in WestExec, a private equity firm specialising in Pentagon boondoggles.

Of course, it wasn’t just the generals who were paid not to notice. The private sector collaborated with the military — and profited handsomely.

A portfolio of ‘defence’ stocks — bought at the beginning of the 21^st century and held until today — rose 10 times, while US GDP only doubled. How’s that for a payoff?

Trillions of dollars were changing hands. The corruption, the conflicts of interest, the temptation to lie, cheat, and steal were obvious.

Turning a blind eye

Here was some high-quality muck, in other words…but where were the muckrakers? Where was the press? Where were the guardians of truth…candor…and justice?

As we saw yesterday, some leading reporters were on the military-industrial payroll. But the blindness was far more widespread than just a few newshounds who were paid to shill for the Pentagon.

Instead, practically the entire press corps…so eager was it to not see the corruption…poked its own eyes out.

Yes, it could get worked up by the killing of George Floyd. That was someone else’s fault — the low-bred white supremacists. They were ‘racists’, and everyone knew it.

All a reporter had to do was rant and rave about it; he might get a better job at The New York Times…invitations to Georgetown parties…and his name in the hat for a Pulitzer.

But Afghanistan? 47,245 times more innocent civilians were killed by US soldiers in the Hindu Kush than by Derek Chauvin in Minneapolis. But heck…Afghan Lives Don’t Matter!

Elite con job

Besides, the Afghanistan debacle was supported by Democrats and Republicans.

It was a con job by the entire elite establishment, not the Trumpista yahoos or the make-believe ‘insurgents’ who invaded the Capitol on 6 January.

The Afghanistan disaster was concocted in elite think tanks. It was directed by elite PhD experts…coming from elite universities. It was supplied by elite corporations…and boosted by elite lobbyists…

And Hillary Clinton (then US Secretary of State) and Antony Blinken (now Secretary of State) were in the White House Situation Room watching the action on TV when Navy seals murdered Al-Qaeda leader Osama bin Laden and members of his family. 

Hidden truth

Now, the truth about Afghanistan is out in the open. But what is still hidden?

The truth about vaccines? About masks? About electric vehicles? About diversity and anti-racism training? About budget deficits? About the US$2 trillion infrastructure bill…or the US$3.5 trillion ‘human infrastructure’ budget? About the Federal Reserve’s money printing?

Or about inflation?

Tune in tomorrow…

Regards,

Bill Bonner,
For The Rum Rebellion