Australia | Dec 10 2015
-PNG govt rejection likely final straw
-Where will Woodside find growth?
-Macquarie, MS buoyed by PNG prospects
By Eva Brocklehurst
Confirmation of what many expected has occurred. Woodside Petroleum ((WPL)) has formally abandoned its pursuit of Oil Search ((OSH)).
Most brokers are relieved because Woodside was considered a careful manager of its capital and making a play for Oil Search was a major risk, even with the prospect's value damped down by a weak oil price. Any raising of the bid price would have been value destructive, in Credit Suisse's view.
The Oil Search board rejected the bid out of hand back when it was launched in September and the intervening period has seen analysts attempting to fathom the ifs, whys and maybes of such a deal progressing. Any raising of the bid price would have been value destructive, in Credit Suisse's view.
The final straw seems to have been cast by the PNG government, which appears not at all keen to pass up its 10% stake in Oil Search for what is perceived as a low-value offer. So, Woodside has walked. The company has confirmed it is not pursuing any alternative transactions to combine the businesses.
Deutsche Bank is not surprised, not being able to envisage a situation whereby the PNG government supported a takeover unless there was sufficient uplift on its $8.20/share investment. As a result Deutsche Bank lowers its target for Oil Search to $8.25 from $9.25 and maintains a Buy rating.
The proposal would have entailed Oil Search shareholders receiving one Woodside share for every four Oil Search shares they held, an offer which the board said grossly undervalued the company.
Woodside's CEO, Peter Coleman,suggested more than a month ago the proposal was already fully priced and a cash component would not be added and brokers suspected after that comment there was little prospect of a successful merger.
There was merit in combining the two, UBS contends, with Woodside's strong cash generation and Oil Search’s growth portfolio. Yet, the risk appetite of both companies and their major shareholders did not appear to converge. The broker envisages Woodside is the more stable and lower risk entity with a high pay-out ratio, attractive to value investors. Oil Search is higher risk but has high-margin growth projects.
Now this opportunity has been shelved, UBS questions what will occur with Woodside's Browse FLNG. As the oil price continues to trend lower more acquisition opportunities may develop and the market is expected to feature further speculation regarding Woodside's M&A capability, the broker suspects. UBS notes Wheatstone is fully priced at current oil prices while the company has now failed to acquire a position in Leviathan or acquire Oil Search.
Citi has chosen Woodside's departure to upgrade to Buy from Neutral on the stock, also upgrading Oil Search to Neutral from Sell. Credit Suisse recently decided to downgrade both Woodside and Oil Search to Neutral from Outperform, citing few positive catalysts for the latter from any growth assets on the horizon. The broker found this a hard call to make for Oil Search but concluded that while it is the highest quality offering in the sector in terms of producing and growth assets, the valuation no longer stacked up.
On the other hand, both Macquarie and Morgan Stanley returned more confident from a tour of Oil Search's PNG assets. Macquarie expects further production enhancements and progress with growth projects will underpin long-term value and retains an Outperform rating.
Morgan Stanley, too, believes the company’s operations were adding value to the base PNG LNG business but, as the development is long-dated, has an Equal-weight rating on the stock.
The database has three Buy and five Hold ratings for Oil Search. The consensus target is $8.00, signalling 26% upside to the last share price. Woodside has one Buy, six Hold and one Sell, with a consensus target of $31.45, suggesting 16.4% upside to the last share price. Woodside's dividend yield on 2015 and 2016 estimates is 5.4% and 4.6% respectively.
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