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Woodside targets Oil Search in $8bn takeover bid

Australia’s Woodside Energy is making an opportunistic A$11.6bn ($8.1 bn) takeover offer for Papua New Guinea (PNG)-focused Oil Search

Aside from pursuing an active exploration campaign targeting some 7 trillion cf of gas Australia-listed Oil Search has a prized 29% stake in the ExxonMobil-led PNG liquefied natural gas export project.

The Australian LNG developer is offering one Woodside share for four Oil Search shares, implying an offer price of A$7.65 a share or a 13% premium.

Analysts believe this is too low and that Oil Search’s management will be unlikely to accept such an opportunistic bid. They are tipped to push for a much higher offer closer to a 25-30% premium. On 9 September, Oil Search shares were trading above the offer price, closing at A$7.85, reflecting an expectation among investors of more to come.

The proposal could lead to a higher bid from global majors, most likely ExxonMobil, which also values PNG as an attractive long-term LNG asset sitting at the lower end of the cost curve and with significant expansion potential.

But with a solid balance sheet and ample liquidity Oil Search will not be in a hurry to sell, even amid a challenging macro environment, Neil Beveridge, an Asia-focused oil and gas specialist at research house Bernstein said.

PNG’s government approval is a wild card too. The administration of prime minister Peter O’Neill holds a 10% stake in Oil Search. While the government is unlikely to block the deal, it may feel that the offer undervalues the assets. It paid A$8.20/share for its stake and is expected to be reluctant to accept Woodside’s A$7.65 share offer.

The share-based acquisition is also less attractive compared to a cash offer, in Beveridge’s view, as some of the Oil Search shareholders, investing in a pure play growth company in the LNG sector, could be less interested in holding Woodside stock.

Oil Search offers a broad set of expansion opportunities that Woodside and other global majors find attractive. The addition of a third train at the 6.9mn tonne/ year PNG LNG project remains a priority for Oil Search. It has strong partner alignment targeting a final investment decision in 2017. Oil Search also holds a stake in a joint venture with Total and InterOil that is planning PNG’s second LNG-export scheme.

The proposed acquisition is expected to encourage further consolidation in PNG, which should be positive for Australia’s Santos: it holds a stake in the PNG LNG project, and is looking to sell assets to shore up its balance sheet. US listed InterOil also has a major presence in PNG.

While buying entire companies may be difficult, asset trading could pick up across Asia as international oil companies and national oil companies (NOCs) continue to shuffle their upstream stakes in large LNG projects in Australia, Indonesia and PNG, James Hubbard, a Hong-Kong-based energy specialist at Australian investment bank Macquarie said.

Asset deals will continue for large and small caps, and some more strategic joint ventures will emerge but outright buying of companies will be limited to NOCs buying in North America, Europe and possibly Africa, in his view.

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