By Nick Toscano
The head of Australian energy producer Oil Search is urging investors to consider the huge benefit of gaining greater access to capital as banks increasingly shun fossil fuels when they vote on a $21 billion merger with Santos next month.
While Oil Search’s independent adviser this week concluded the tie-up was in Oil Search shareholders’ best interests, it calculated that the merger ratio may undervalue the company’s contribution.
Oil Search operates all of Papua New Guinea’s producing oil fields.
The deal, which would give Oil Search investors a 38.5 per cent stake in the merged group, did not fully reflect Oil Search’s underlying value, which was between 43 per cent and 44 per cent, adviser Grant Samuel said.
“There is clearly a risk that the funding and other strategic benefits do not fully compensate shareholders for this dilution,” it said.
Oil Search acting chief executive Peter Fredricson, who held discussions with investors on Thursday and Friday, said the board remained of the view that the underlying value was “just one part of the equation”. Without the merger, Oil Search would face significant challenges in funding growth plans in Papua New Guinea and Alaska.
“We’ve looked at a whole range of things that get us to the 38.5 per cent ... supplemented by the strategic benefits of the larger merged entity’s access to investment-grade debt capital markets and the cost of funds which is significantly below what we as Oil Search can borrow today,” Mr Fredricson told The Age and the Herald.
“The two companies are better together going forward than standing alone.”
In promoting the merger, both companies say creating a “regional champion” of greater size, scale and ability to self-fund growth projects will be increasingly important as the oil and gas sector faces mounting pressure over its contribution to global warming. Accelerating climate concerns across Australia and worldwide are prompting financial institutions to retreat from all fossil fuels, pushing the cost of capital higher.
The tie-up would propel the combined entity into the rankings of the top 20 biggest oil and gas producers globally, with assets spanning Australia, PNG , Timor-Leste and North America.
Ahead of an Oil Search shareholder vote on December 7, requiring at least 75 per cent support to proceed, prominent investor Allan Gray has been publicly expressing reservations about the terms of the transaction amid concerns the company is being given away too cheaply.
Mr Fredricson on Friday said he did not believe larger investors in the company shared Allan Gray’s concerns. “In our engagements with shareholders, the vast majority of shareholders do not have the same opinion,” he said.
Analysts on Friday noted Oil Search’s “significant funding hurdles” for growth assets was an important argument in favour of the merger deal, but investors would have to weigh up the differing value considerations.
“The Oil Search board also continues to unanimously recommend that Oil Search shareholders vote in favour of the scheme in the absence of a superior proposal,” Royal Bank of Canada energy analyst Gordon Ramsay said
“The key question for Oil Search shareholders is: does the funding, change in company asset mix, and other potential PNG strategic benefits of this transaction fully compensate Oil Search investors for the dilution in underlying value implied by the merger terms?”
Nik Burns, of investment bank Jarden, said synergy benefits from the merger and improved funding capacity to unlock Oil Search’s growth portfolio “should lend support in favour of a merger”.
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