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PNG a logical bid for Woodside

Woodside Petroleum and Oil Search confirmed yesterday that two of Australia’s oldest oil and gas companies have sat down for coffee to discuss a shared future, a move that could delay the Browse FLNG project further.

Woodside has made a non-binding indicative proposal valued at around $11.65 billion to the Papua New Guinea-focused Oil Search for one Woodside share for every four Oil Search shares.

Woodside’s confidential and non-binding proposal to merge through a scheme of arrangement is “consistent with Woodside’s strategy of delivering superior shareholder returns by maximising the value of our core assets, leveraging our capabilities and growing our portfolio”, the firm said.

Woodside needs to complete due diligence, while if Oil Search is open to the idea it needs to grant an agreed period of exclusivity and secure support from key stakeholders, including the PNG government.

The proposal would also be conditional on the parties entering into a binding implementation agreement.’

If successful, Woodside will become one of the largest players in the PNG energy sector, and will establish a substantial onshore presence in Australia’s northern neighbour.

Cautious
A cautious Oil Search said that it intended to review the proposal, but there was no guarantee that a binding proposal can be agreed between the parties.

And it stressed it did not need Woodside given its 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.

“This, combined with the company’s low operating cost producing assets, reserves upside, significant discovered resources and extensive and high quality exploration acreage position provide substantive scope for capital growth and position the company to capitalise from a recovery in the oil price,” the company said.

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

Oil Search recently posted the highest half-year profit in its 86-year history off the back of production up almost 50%, despite delivering into materially weaker oil and gas markets.

The company’s net profit after tax for the first six months of the year was $US227.5 million ($A316 million), with revenue up 69% to $863.8 million, driven by a more than a three-fold increase in oil, condensate, gas and LNG sales, from 4.7 million barrels of oil equivalent to 14.5MMboe thanks largely to the ExxonMobil-operated PNG LNG project’s first full year of production.

The PNG LNG project performed at 7.1MMtpa, above the nameplate capacity of 6.9MMtpa.

At June 30 the company had $843 million in cash and $750 million in undrawn corporate debt facilities.

It expects to produce between 27-29MMboe this year, and is seeking to prove up and appraise some 7Tcf over the next 18 months with a string of high impact wells.

Woodside’s decision to make an all-scrip offer reflects the fact that Oil Search’s share price has been robust, while Woodside’s price has been eroded by low LNG prices and its significant gearing – 19.9%, up from 3.9% last year.

Woodside needs its takeover of Oil Search to be a success because its dividend, profits and share price are coming under threat and its shares are at near 52-week lows.

Reaction

Independent analyst Peter Strachan called the merger bid a “logical move” for Woodside, given the proximity of PNG to Woodside’s Perth-based headquarters and the strong ties between the two companies, including the presence of former exploration director Dr Agu Kantsler and former acting CEO Keith Spence as non-executive directors on the Oil Search board.

Woodside wants to get its hands on more LNG that it can trade from its recently established Singapore desk, which made a $62 million profit last year, Strachan said.

Oil Search has significant gas reserves to support a third LNG train, subject to appraisal across 2.5 trillion cubic feet P’nyang, and other fields such as Barikewa, and merchant gas from the likes of Horizon Oil in the Foreland Basin.

The real benefit of Oil Search to Woodside is that Train 3 and the Elk-Antelope are onshore and have high liquids contents.

“The pipeline goes right by Horizon Oil’s Stanley, Elevala and Ketu fields, so you could get that gas on first, there’s about 1.5Tcf there, and then extend the pipeline to P’nyang and bring that gas from further up the hill later on,” Strachan said.

“It’s just a logical expansion for Woodside to take on these low-cost production assets in PNG.”

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