Oil Search tipped to rebuff Woodside’s $11.6bn offer

Oil Search is expected to knock back Woodside Petroleum’s $11.65 billion all-scrip takeover offer as too low.

Oil Search is expected to knock back Woodside Petroleum’s $11.65 billion all-scrip takeover offer as too low when its board meets next week to consider a deal that would give Woodside growth options in Papua New Guinea and a share in one of the world’s most profitable LNG plants.

In a move that has raised ­questions about prospects of the Woodside-operated $35bn Browse floating LNG project off Western Australia, Australia’s biggest stand-alone oil and gas company yesterday said it had made a conditional takeover offer of one Woodside share for every four Oil Search shares.

Based on the closing price of Woodside’s shares on Monday, the offer represents a 14 per cent premium, but based on the ­volume-weighted average of shares in the three months to ­August 27, when speculation of the deal first emerged, it is a 23 per cent premium.

Oil Search, which has a strong balance sheet and is not showing signs of distress amid current low prices, did not reject the proposal immediately. But managing director Peter Botten gave every indication that that was his inclination.

“While Oil Search will consider the proposal, it should be noted that Oil Search has a material ­equity position in the world-class PNG LNG project and attractive, low-cost, LNG development opportunities, including the PNG LNG Train 3 expansion and the Papua LNG project,” Mr Botten said.

“Clearly, Oil Search shareholders are entitled to an offer which adequately reflects this value potential.”

It is understood the Oil Search board is not planning to meet to discuss the proposal until next week.

Yesterday, investors bet that Woodside, or someone else, would come back with a better offer, pushing Oil Search shares up $1.17, or 17 per cent, to $7.90.

Woodside shares slipped 92c, or 3 per cent, to $29.66, valuing the offer at $7.41 per Oil Search share.

Investors and analysts were near unanimous in the view that the offer does not reflect adequate value for Oil Search’s assets and growth prospects.

“It’s bid at $7.65 (using Monday’s close) that represents $US65 oil from a company with little ­organic growth for a company with a considerable amount of ­organic growth,” Perpetual Investments analyst Andrew Blakely said.

“Paying this price for high-quality, free cashflow-generating, low-cost, long-life expandable ­assets is always a good strategy, but I don’t feel Oil Search is in a stressed position where it needs to take what would be seen to be an ­attractive price (for Woodside using scrip).”

The bid pales in comparison to the 50 per cent premium Shell in April agreed to pay to secure its $91bn scrip-and-cash acquisition of BG Group.

“We don’t see Oil Search accepting an offer at this level, given the quality of its growth portfolio and value potential,” UBS analyst Nik Burns said.

Mr Burns queried whether the approach reduced the likelihood of Browse going ahead, as did ­Credit Suisse analyst Mark Samter. “We are more confident that Browse will not proceed,” Mr Samter said. He said a price closer to $10 a share would probably be needed for the deal to go ahead.

“In what appears a somewhat inelegant process to date, today’s share price reactions only made a deal harder still,” Mr Samter said.

“The capital structure of the offer, and initial offer price, make little sense to us.”

Wood Mackenzie’s British global LNG and gas head, Noel Tomnay, took to Twitter to say that Woodside’s move on Oil Search was based on the recognition that lower-cost LNG, like in PNG, was key and that it was not a vote of confidence in Browse.

Oil Search said the offer from Woodside was contingent on due diligence, support from key stakeholders and shareholders and Woodside being satisfied that the transaction would be supported by the PNG government.

PNG is a 10 per cent shareholder in Oil Search, which has been in the country for 86 years, and is also able to block the merger on national interest grounds.

“PNG government approval is a wildcard,” Bernstein analyst Neil Beveridge said.

“While Woodside brings a bigger balance sheet, which will be important for future growth, Oil Search’s relationship with the PNG government is a unique.”

The bid opens the door for a competing bid from a global major.

ExxonMobil, Oil Search’s operating partner in PNG LNG, has said it is prepared to make acquisitions, while France’s Total, which is the operating partner in the Papua LNG project, is also seen as a potential counter-bidder.

Both the oil majors could be keen to get a stake in the other’s project, which may lead to a more cost-effective shared development of Papua LNG, which is studying development of the Elk/Antelope gasfields.

The deal buoyed energy stocks yesterday, with Santos, a minority partner in PNG LNG, ending a six-day losing streak to finish 5.3 per cent higher and AWE up 8 per cent and Origin Energy up 3.2 per cent.

While the Oil Search move confirms Woodside is not focused on a Santos bid, it shows there is buying interest in oil and gas ­assets .