Senex Bid Has Put Focus On AWE Valuation Gap

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-Brokers struggle to find synergies in bid
-AWE shares trade at large discount, but have been for a while
-Opens AWE to other bids?

By Eva Brocklehurst

It was very quick. No sooner had Senex Energy ((SXY)) raised the prospect of a merger with AWE ((AWE)) than it was all over as the AWE board rejected it out of hand. Senex then withdrew the offer.

The indicative proposal sparked a lot of speculation among stockbrokers, given there were no real synergies between the two energy stocks. Senex has a strong focus on Australia's Cooper Basin while AWE's has diverse assets, including Australia's Bass and Otway Basins. The company's big potential is in Indonesia's Ande Ande Lumut and the Sugarloaf Eagle Ford shale oil in the US, both operated by others.

The rejected offer comprised 1.9 Senex shares for every AWE share, which would have valued AWE around $1.44 a share based on the Friday December 13 closing price. Morgan Stanley observes that such pure scrip proposals, uninvited, have low rates of success. What it does suggest to most brokers is that AWE is quite undervalued. Macquarie thinks the quick rejection and subsequent withdrawal of the offer signals a considerable gap between where Senex and the AWE board see appropriate value.

What surprised JP Morgan was not the bid as much as the source of the bid. There is no operational cross over between the two companies and AWE doesn't operate many of its assets. There are no shared assets or even shared positions in basins. The only tentative link, in the broker's view, is the potential unconventional gas business of Senex in the Cooper and AWE's Bass and Otway conventional exposures. In other words, Australian east coast gas. Hence, a suspicion the bid was opportunistic, as AWE is undervalued while Senex is trading at a relatively full valuation. JP Morgan has also been surprised by the lack of market appreciation for the Ande Ande Lumut deal with Santos ((STO)), whereby AWE is farming out portion of the play to a strong experienced operator. Moreover, the operator of the Eagle Ford assets, Marathon, recently reported on downspacing trials which have positive implications for the Sugarloaf asset.

AWE has a relatively open register so a board-approved deal is essential and the rapidity with which Senex was rebuffed suggests to JP Morgan that a follow-up bid is unlikely. The offer was fair value, according to Deutsche Bank, but offered no compensation for the upside that's present in Ande Ande Lumut and this was likely to be the reason behind the AWE board's rejection of the bid. Again, with no obvious synergies, an improved bid is unlikely and the broker observes an increased offer would probably result in AWE shareholders owning more than 50% of the merged entity. 

From the Senex point of view, Macquarie observes a successful merger would have been 24% accretive to valuation. That said, the broker believes, given no overlap in the asset base, synergies would have been restricted to head office savings. Macquarie speculates that Senex may have been attempting to acquire AWE to take advantage of the relatively inexpensive stock and subsequently sell off non-operated assets to unlock value. This would have been risky, given the difficulty in getting AWE board approval for such a merger. The broker is encouraged by the fact that Senex did not revise its offer. What the bid has unleashed, in Macquarie's opinion, is concerns from investors looking to retain a pure exposure to the company's higher margin, low capital intensity, oil asset base in the Cooper Basin, particularly as Senex reveals an acquisitive side. JP Morgan believes Senex's peer, Drillsearch ((DLS)), offers better value in the Cooper.

The proposal does expose AWE to other interested parties. Macquarie observes, with the current share price significantly discounting asset value, the industry was bound to ultimately recognise this value and further corporate interest could ensue. Analysts at Morgan Stanley remain unconvinced, however, observing AWE shares have traded at large discount since 2009. There has been more than ample time for consolidators to realise this value gap, Morgan Stanley analysts conclude.

Comparing the two stocks on the FNArena database shows AWE with five Buy ratings and one Hold (Deutsche Bank). The consensus target price of $1.94 suggests 54.8% upside to the last share price. Senex has three Buy ratings and two Hold. The consensus target price is 86c, suggesting 19.9% upside to the last share price. 

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