Woodside's Oil Search tilt not enough

Oil Search's Kutubu Central Processing facility in Papua New Guinea

Oil Search's Kutubu Central Processing facility in Papua New Guinea

Oil Search should not prematurely shut down Woodside’s ambitious takeover bid, analysts say, with the current market uncertainties favouring firms with scale.

Touted as the largest merger in Australia since 2011, Woodside’s proposed takeover bid of Sydney-based firm, Oil Search has been criticised as too low and looks unlikely to go ahead.

The Age today said Woodside would need to sweeten its bid above pre-bid prices, which values Oil Search at $7.65 a share.

The Australian meanwhile said the $11.65 billion deal is unlikely to go ahead given the prospects in Papua New Guinea and the mere 13.6 per cent premium Woodside has placed on Oil Search shares.

Alan Kohler, founder of Business Spectator tweeted this morning that Woodside had overlooked Santos, which is in asset selloff mode, when considering its forays into the PNG gas market.

Credit Suisse told Dow Jones that for Woodside attaining Oil Search’s liquefied natural gas assets would leave it with both a larger LNG operating footprint and quality growth projects to pursue.

Oil Search stocks spiked in the wake of yesterday’s takeover proposal announcement – reaching $7.9 per share, up 17 per cent.

Credit Suisse however similarly rallied the criticism of Woodside’s proposal, saying the initial price offering was too low and that $10 per share would be more realistic.

But oil and gas analyst with Sydney-based wealth management firm, Canaccord Genuity, Tim Masters said Oil Search should not be too hasty with its decision.

“The board should be more open than in the past to consolidation because size does help,” he told Gas Today.

“The company would be able to run leaner and get up to scale on its projects faster with a larger firm. That said, maybe the board is less willing because of their own growth projects which they hope to deliver returns.”

“There certainly is a view of smaller companies to go it alone in this low oil price environment and chase their own growth prospects. But size does help.”

Masters added that with a high-profile stakeholder in the PNG LNG project, like Woodside, the joint-venture could be better positioned to negotiate in future with the PNG government, which is the regulator and also a 19.6 per cent stakeholder in the Exxon-operated project.

More widely, Masters said he was anticipating more M&As in the wake of the 2014/15 reporting season and as the low oil price continues to take scalps.

He added however that there is a clear disconnect in valuing oil and gas firms in M&As.

“There is a disconnect between what a target will think its operations and future projects are worth, versus what a buyer will value it at as they consider the oil price volatility and its impact.”

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