By Sonali Paul

MELBOURNE (Reuters) -Australian gas producer Woodside Petroleum Ltd’s agreed merger with BHP Group’s petroleum arm is in the best interest of its shareholders, an independent expert said, valuing the combined group at around $40 billion.

Global miner BHP agreed to hive off its petroleum business to Woodside last year in a nil-premium deal that will give BHP shareholders a 48% stake in the combined group and turn Woodside into a top 10 global independent oil and gas producer.

Accounting firm KPMG assessed the value of the combined group at between $37.2 billion and $42.3 billion, equating to a per share valuation of A$26.25 to A$29.81, which was equal to or more than its valuation of Woodside’s current per share value.

“Based on these measures, the proposed transaction is, in our opinion, fair to Woodside Shareholders,” KPMG said in a report released to Woodside shareholders on Friday ahead of a vote on the deal on May 19.

Woodside’s shares fell 1.2% to A$32.50 after the report was released, compared with a 0.5% gain in the broader market.

“I think there’s strong support for the deal going ahead from a Woodside investor perspective,” UBS analyst Tom Allen said.

Woodside’s board also unanimously recommended that the company’s shareholders vote in favour of the merger.

KPMG’s valuation of the combined group was below an estimate by UBS, which valued the merged group at $64.8 billion, or about A$34.60 a share, based on the investment bank’s current oil price outlook.

KPMG assumed a Brent oil price of $100 a barrel for 2022, falling gradually to $70 a barrel in 2026.

The independent expert highlighted the strength of the combined balance sheet, with BHP assets being handed over debt-free, which would lower the combined group’s gearing to around 8%, compared with Woodside’s target gearing of 15% to 35%.

“BHP Petroleum’s asset base provides Woodside with immediate access to significant development and growth opportunities, within a time frame that is unlikely to otherwise have been available to Woodside as a standalone entity,” KPMG said.

In a separate announcement, BHP said based on Woodside’s share price of $25.55 on April 6, the implied value of BHP Petroleum is $23.4 billion.

Woodside said on Friday it expects to achieve its target of more than $400 million in cost savings from combining the two groups by early 2024, including cutting executive jobs and other staff, but said carrying out the changes would require one-off costs of up to $600 million in the first two years.

The independent expert’s report confirmed that Woodside will be inheriting about $3.9 billion in oil and gas closure and rehabilitation liabilities from BHP.

(Reporting by Shashwat Awasthi; Editing by Uttaresh.V, Subhranshu Sahu and Tom Hogue)