Australia’s Woodside bids for Papua New Guinea LNG exporter Oil Search

By JAMES PATON and ANDREW HOBBS
Bloomberg

Woodside Petroleum offered A$11.65 billion ($8.1 billion) in stock for Oil Search as it aims to take advantage of a collapse in oil prices in what would be the biggest energy deal between non-related companies in the Asia-Pacific region.

Woodside offered one share for every four Oil Search shares, which amounts to a premium of about 14% based on Oil Search’s closing price on Monday. Oil Search rose 16% to A$7.835 and Woodside slid 2.9% to A$29.68 as of 1:12 p.m. Sydney time.

Oil Search was one of the few oil and gas companies to report a jump in profit in the first half, driven by its Papua New Guinea liquefied natural gas (LNG) project.

“The market is sending a pretty clear signal that Woodside’s offer is undervaluing the Oil Search stake in the PNG LNG project, which is really one of the most competitive LNG investments in the whole Asia Pacific region,” said Angus Nicholson, a market analyst at IG Markets Ltd. in Melbourne. “Not to mention Woodside will need PNG government support, so that could be tricky.”

Papua New Guinea’s government holds a 9.8% stake in Oil Search, according to data compiled by Bloomberg. Woodside CEO Peter Coleman identified the nation as a prospective target area in May last year after he pulled out of a planned investment in Israel. Oil Search has a 29% interest in the PNG project, which is operated by ExxonMobil.

“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,” the company said in a statement. “Oil Search shareholders are entitled to an offer which adequately reflects this value potential.”

The implied premium of 13.6% compares with the average 13.7% premium of three similar-sized global oil exploration and production acquisitions in the past year, according to Bloomberg data.

Companies have announced $172 billion of oil and gas acquisitions this year, up from $123 billion a year earlier, data compiled by Bloomberg show. Brent crude, the benchmark for half the world’s oil, has tumbled more than 50% in the last year.

The proposal sparked a rally in the shares of other Australian energy companies, with Santos rising as much as 13% in Sydney trading and Origin Energy surging as much as 6.6%.

‘Bidding War’

Oil Search appointed Morgan Stanley and Allens as advisers. Woodside is being advised by Bank of America, Gresham Advisory Partners and Herbert Smith Freehills LLP.

Oil Search “is not in a hurry with a manageable balance sheet and some of the lowest-cost LNG in the region,” Cristobal Garcia, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a report, adding that he sees potential for a 27% premium. “This could turn into a bidding war" with Total and ExxonMobil involved, he wrote.

The premium offered by Woodside is probably too low, and the bid faces a number of hurdles, Nik Burns, a Melbourne-based analyst at UBS Group, wrote in a research note. Oil Search’s LNG expansion projects rank in the top two or three undeveloped conventional developments globally, according to UBS.

“The transaction makes sense for Woodside,” implying an oil price of about $68.30/bbl, Burns wrote. “We don’t see Oil Search accepting an offer at this level.”

PNG LNG

Oil Search's managing director Peter Botten last month identified oil and gas companies as targets, saying in an interview with Bloomberg that the plunge in share prices following oil’s collapse meant that it’s now probably cheaper to buy a company than an asset. Botten and chief financial officer Stephen Gardiner didn’t immediately return calls, while a spokeswoman for Perth-based Woodside didn’t immediately reply to a voicemail.

Among proposed LNG projects in the Asia-Pacific region, developments in Papua New Guinea are in the best position to go ahead, Credit Suisse Group analysts said earlier this year.

Oil Search’s production in the first half of 2015 almost tripled to 14.3 million bbl of oil equivalent, while sales rose to $864 million in the period, fueled by the LNG project with Exxon. The $19 billion PNG LNG project is considering an expansion, while Oil Search is also in a venture with Paris- based Total and InterOil that’s planning a second LNG development in the Pacific country.

Woodside’s biggest acquisition so far was the $2.75-billion purchase of Apache’s stakes in Australian and Canadian LNG projects.

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