Woodside's growth dilemma as it pulls Oil Search pin

2015-12-08 10:26:45.568 GMT

By Michael Smith

     Dec. 8 (Financial Review) -- It is back to the drawing board for Woodside chief Peter Coleman, who has decided to bite the bullet on his $11.6 billion takeover ambitions for Oil Search.

     The decision is a setback to Woodside's ambitions to build a global gas network, but withdrawal was the only sensible approach for Coleman given the resistance from Oil Search and its 10.1 per cent stakeholder, the Papua New Guinea government.

     The downside is that Woodside is back where it started. It remains under pressure to utilise its relatively robust financial position to find growth in an industry littered with distressed assets and acquisition opportunities.

     Being one of the few players with the firepower to pull off a major deal in the struggling oil and gas sector is not a bad position to be in and Coleman has plenty of options.

     But questions are being asked about the thinking behind the Oil Search bid, which was doomed from day one, and whether it was a dummy bid for a more ambitious play.

     The failed Oil Search bid highlights the challenge of getting transactions away in the volatile oil and gas sector.

While falling oil prices have created a buyer's market, it is still a challenge to find a transaction where vendor and buyer expectations align.

     Iluka Resources this week abandoned its 18-month effort to buy Ireland's Kenmare after the target's biggest shareholder said it would not support the bid.

     May not look silly

     As one investment banker said on Tuesday, Coleman's decision to walk away from Oil Search will ultimately be judged on where oil prices go over the next year. If they continue to plunge and he is able to pick up other assets at the bottom of the cycle he won't look too silly.

     But if oil prices stabilise and he misses the bottom of the cycle without bedding down a sizeable deal, then investors will be asking questions.

     Moving too early can backfire, as Royal Dutch Shell's

$US70 billion ($96 billion) takeover of BG Group has shown. The Qatar Investment Authority reportedly sold £1 billion ($2

billion) of shares in both companies last month as support for the mega-merger flags. Shell made its bid for BG in April when oil prices were trading at just under $US60 a barrel.

     Confirmation that Woodside was walking away from Oil Search came on Tuesday, the day after oil prices fell 6 per cent to $US37.77, their lowest level in almost seven years.

There are now predictions it could fall as low as $US20.

     It was a horror show for oil and gas stocks, with perennial underperformer Santos losing another 13 per cent.

Woodside closed 4 per cent weaker and Oil Search lost 16.4 per cent, partly due to weak commodity prices but also because it is now stripped of its takeover premium.

     Oil Search's long-serving chief Peter Botten is not losing too much sleep over Woodside's withdrawal though.

     Dug in heels

     Oil Search dug its heels in from the beginning on the basis that it undervalued its liquefied natural gas assets in Papua New Guinea. Botten never had any intention of playing ball at that valuation, which was highlighted by the cat-and-mouse game that followed in the days after the bid became public in September.

     Coleman flew from Perth to Sydney to meet Botten, but it turned out the Oil Search boss was already in PNG, meeting with the target company's biggest shareholder, the PNG government.

     Woodside's critics believe the process was badly managed and it underestimated the resistance it faced from the Oil Search board and the PNG government. With other bids in the sector at the time coming in at a 40 to 50 per cent premium, the 14 per cent premium Woodside offered never looked enticing.

     The focus now is on what Woodside will do next.

     Woodside resisted pressure from shareholders for years to make a big acquisition, and the all-share bid for Oil Search in September signalled a sudden change in tack. While combining the two companies made strategic sense, investors questioned the wisdom of going after the Papua New Guinea producer when there were other high-quality distressed assets on the market.

     Plenty of opportunity

     With oil prices falling over Monday night to their lowest levels in almost seven years, there will be plenty of other opportunities for strategic plays in a sector ripe for consolidation. Coleman is said to be a patient man who is determined to pick up quality assets at the bottom of the cycle. If that's the case, then Oil Search was the wrong target, as it had too much support from investors and key stakeholders to bow to a low-ball bid.

     Investors will be relieved Woodside is not willing to overpay for the assets, favouring the return of excess capital to shareholders.

     The flipside is that Coleman remains under pressure to strengthen Woodside's global presence and nail down a deal.

Woodside last year withdrew from its $US2.5 billion investment in the Leviathan gas venture in Israel.

     Woodside could also stick to its own backyard and return excess capital to shareholders, which is not a bad position to be in either, given the mess some of its peers are in.

     Credit Suisse added Oil Search to its short portfolio this week, arguing the Woodside bid had left the stock vulnerable.

It also believes Woodside is doing the right thing walking away, based on historic evidence that equity-financed acquisitions of listed assets often result in share price underperformance.

     Transfield resists but leaves door open to Ferrovial

     Broadspectrum chairman Diane Smith-Gander has left the door open to negotiate a higher offer from Spanish predator Ferrovial by talking up her company's prospects without rejecting the unsolicited offer outright.

     Broadspectrum, or Transfield as the company is better known, has launched its defence against Ferrovial's $1.35 offer, which values the company at $715 million. It is clearly resisting the current price on the table, but it is important to note it has not recommended against it either.

     It notes its shares were trading above $1.60 as recently as June and talks up its performance over the past 12 months, including $2 billion worth of additional contracts and meeting upgraded earnings guidance.

     However, it is also signalling any major pick-up is still several years away, noting the company is well placed to benefit from an improvement in business activity from other key markets in the 2017 financial year.

     This does not negate the fact that its shares were trading at 85¢ at the end of the last week, giving Ferrovial the opportunity to pounce.

     Smith-Gander has done the right thing by not rejecting the offer outright if there is any hope of negotiating a higher offer when senior Ferrovial executives visit Australia next week.

     Key Broadspectrum shareholders, including Allan Gray, have also said the offer is opportunistic and does not fully value the company, but they have not committed themselves to supporting or rejecting the offer either way.

     Broadspectrum shares slipped 6 per cent to $1.18 on Tuesday morning, reflecting investor nervousness that Broadspectrum will send Ferrovial packing a second time. Some shareholders have decided to get out of the stock while it is still has a takeover premium attached.

     Ferrovial has pitched its second offer direct to shareholders, who will ultimately determine the outcome.

     If Broadspectrum can squeeze another 5¢ or 10¢ out of Ferrovial, it can recommend the bid and still save some face despite rejecting the initial $1 billion offer a year ago.

'jft310' pid='65201' datel Wrote:Interoil openned tbe TBR data room in the last few weeks to interested bidders . We shall see.

 Jft - I'm not trying to pump,because I now realize that oil prices will not come' roaring' back anytime soon. As Phil once said"oil is down there somewhere".....I believe he meant somewhere in our almost 4 million acres . If Raptor contains oil (which I believe is likely), then I think most of it would be to the southeast of Raptor #1 which should place it in PRL 15 . That is one of the reasons I have stated in the past that in future years,Total will understand they have purchased a jewel (in PRL 15).....when all is said and done they will look like"very cleaver cookies" . Hagd.

'jft310' pid='65201' datel Wrote:Interoil openned tbe TBR data room in the last few weeks to interested bidders . We shall see.

Where is the Press Release?

'jft310' pid='65205' datel Wrote:Sageo . GOD bless you !!!Period The End

 Jft - Before you put the "Period",please allow me to say "HE" already has in so many ways ! I have a little dry powder left,but after talking with my best friend (wife),we decided that instead of purchasing more IOC at these good prices,we would up our contributions to Wounded Warriors and a few other worthy recipients. As our friend Hemi says ,good "health & happiness" to all our "partners in crime".....well,maybe not crime so I'll just say ' backroom discussions'. A pleasant evening to all.

“Ant 7 has not been approved yet per public statements . So your statement saying 2 more wells are required is pure negative speculation on your part . Please provide a link to any public statement anywhere stating Ant 7 has been approved !!You can't I bet . So what's you motive ????”

That was a direct quote from one of JTF’s posts blasting me for saying we might need two more wells before certification despite the fact that two different companies (Both IOC and OSH) have publicly mentioned the possibility.

“JV considering Antelope 7 appraisal well in 2016, to assess potential western field extension “(page 19) Oil Search November 23, 2015
http://www.oilsearch.com/Media/docs/1511%20OSH%20Investor%20Field%20Trip%20FINAL-ad2328b8-8bef-4765-8df4-694e9122fa57-0.pdf

“The joint venture is also considering an additional appraisal well on the western flank of the Antelope field that could add an incremental volume of 1 to 3 Tcfe” InterOil November 18, 2015
http://www.interoil.com/investor-relations-news-and-press-releases/2015-2/antelope-4-sidetrack-1-confirms-high-quality-reservoir/

They never came out with a press release about any of the delays, but one they hinted about it, you can bet it was a sure thing. Once they start hinting about additional wells needed, you can be sure it will happen.
Yet JTF can say things like “IR says they are trying to get Ant 7 drilled simultaneous with Appraisal so no delay into 2017 . Today no approval of Ant 7 .” An absurd statement because they are scheduled to spud A6 within 3 weeks and they either need A7 or they don’t. How can they appraise and drill if they haven’t even decided if they need A7 let alone selected a location and done any site prep.

Now you post knowledge of confidential data room. I ask you JTF: What is your motive? Where is your link?