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Woodside Petroleum’s bid for Oil Search and Beyond!

September 22, 2015 | Team Kalkine
Woodside Petroleum’s bid for Oil Search and Beyond!



It looked as if there was a chance that two of Australia's largest oil and gas companies could join hands in the backdrop of the slump in oil prices when Woodside Petroleum made an all stock bid for Oil Search Limited which values the company at around $ 11.64 billion. For Woodside, which has been struggling for growth recently, the deal would increase its bet on natural gas at a time of low prices, and on one of the poorest countries in Asia Papua New Guinea, just as many major oil companies are concentrating on assets in the developed world. The main asset of Oil Search is a 29% stake in a $19 billion liquefied natural gas project known as PNG LNG, which is being led by Exxon Mobil Corp.
 

Offer Details

The Woodside offer, comprising one of its shares for every four of Oil Search’s, represented a 14% premium to Oil Search’s closing share price at the time of the offer, though shares in both companies had dropped nearly 30% in the past year. Woodside said the proposal was consistent with its strategy of delivering “superior” shareholder returns while Oil Search said its board would consider the proposal. Any possible deal could spark signs of a surge in mergers and acquisition activity in the oil industry, where many financially-stretched companies are viewed as possible sellers or targets following the more than 50% drop in oil prices since last year. The proposed deal would be one of the biggest in the sector since Royal Dutch Shell PLC finalised a $70 billion deal to buy BG Group PLC in April.


Financial summary (Source: Company Reports)
 

Industry Scenario

Experts feel that the fall in oil and gas prices could cause further industry consolidation, as companies with high costs and heavy debts struggle. In Australia, for example, companies have invested more than US$200 billion in recent years on huge LNG developments to freeze gas into liquid form for export. Though demand for gas from countries like China is still expected to increase steadily in the future, the current supply glut in global gas markets has made many of those projects unviable in the near term. Santos Ltd., Australia’s fourth-largest oil-and-gas company, recently announced that it would consider offers for its assets following a 70% share-price slump. Another Australian company, Origin Energy Ltd., in August sold a majority stake in New Zealand power company Contact Energy Ltd. for about $1.13 billion to cut debt after borrowing heavily to fund a major LNG project.
 

The Rejection

Analysts say that while adding Oil Search made sense for Woodside because it has been struggling to raise its reserves and output levels, it may have to raise its bid considerably to clinch a deal.“Woodside’s offer…is opportunistic and too low,” said Neil Beveridge, an analyst at Bernstein Research who added that rival bids could be forthcoming from major oil companies, including Exxon Mobil. Any deal would also need to be in line with the regulators in Papua New Guinea where the government owns a 9.8% stake in Oil Search, the country’s largest oil producer.

Woodside Chief Executive Peter Coleman’s experience in Papua New Guinea could help smooth the deal because of his 27 years experience at Exxon Mobil, where he helped lead the company’s development of the PNG LNG project.
 
While rejecting the Woodside bid, Oil Search has left the door open for Woodside or other rival bidders to make a higher offer. After cancelling a planned meeting between the two companies, Oil Search said that its board had made a unanimous decision to reject the offer. It described the all share offer as highly opportunistic and without merit because it grossly undervalued the company. The chairman Rick Lee said that he was open to other offers and that there was no agreement for exclusive talks with Woodside. Market speculates a good chance that Woodside will increase its offer in the next month or so and that, compared to the offer price of $ 7.65 per share, only a bid in the region of $ 8.50 per share stands a chance of success. Exxon Mobil may also emerge as a possible white knight because it would have lots of synergies with the acquisition of Oil Search. Another possible candidate would be the French oil major Total because it controls a separate Papua LNG project.
 

Beyond Rejection

Meanwhile, it is believed that Woodside Petroleum is considering raising $ 2 billion or $ 3 billion in debt to fund a sweetened bid for Oil Search. An amount of $ 3 billion would raise the value of the $ 7.65 scrip offer by an extra $ 1.97 a share to total $ 9.62 per share. This would also signal that Woodside is serious about the transaction after experts have suggested that a bid of approximately $ 10 per share would be required to clinch the transaction. However, some Woodside investors could be unhappy if the company sweetened its offer when there was no competing bid on the table. It should also be borne in mind that a large part of the resources on the Woodside balance sheet are earmarked to fund the acquisition of the Kitimat LNG project from Apache. It should also be remembered that the PNG government has a powerful role in any deal with its 10% stake in Oil Search and its direct stake in the profitable PNG LNG project.


WPL Daily Chart (Source: Thomson Reuters)
 
Currently, Woodside Petroleum is trading at a price of $29.65.

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