This is a partial reprint and update (due to the OSH release) to an earlier post of mine on another thread. Apologies to those who have read much of this previously.
I believe that IOC may have gambled that accepting the OSH bid would force Exxon's hand to increase its earlier bids (which I believe were those from "Party A" in the MIC). This IOC strategy may well have worked as we are seeing with this new bid, presumably from Exxon, presumably in the same structure as the OSH bid, and presumably superior to the OSH bid.
I also believe that Exxon must, to some extent, adhere to the structure of the OSH bid in order to force the IOC BOD to accept the Exxon Bid as superior due to increases in similar terms. Thus, I believe that the Exxon bid will offer shares/cash and CVRs.
Additionally, I believe that Exxon can easily offer such a superior bid for a number of reasons:
1. Offering Exxon shares for part of the bid is much, much easier for Exxon to handle, due to the number of its shares outstanding, and will be a far smaller dilution as a result.
2. Exxon, with $10 billion cash, has no reason to cap the share/cash exchange at $770 million, as does OSH. At present, OSH can not top this amount without relinquishing more of IOC to Total, post-deal.
3. Exxon shares and CVRs are more attractive to US holders of IOC (the vast majority), even if those new IOC/Exxon shares will only receive a diluted 'bonus' from their participation in the eventual use of E/A resources.
4. Exxon can realize the various available synergies for both PNG LNG and Papua LNG that OSH has touted far easier than Total or OSH, as it already has a successful LNG plant up and running, a highly-trained LNG plant construction workforce currently on island sitting idle, a pipeline structure in place, and, importantly, a nicely-situated "T" in that pipeline near E/A.
5. Exxon can assure that A7 is both drilled and that the certification appraisal is conducted fairly. This would be due partly by enjoying the right to select one of the two appraisal companies and also by having access to ALL of the data necessary for a fair appraisal. Additionally, Exxon has employees with equal or better knowledge of reservoir appraisal than any of the remaining SPA companies.
6. Exxon will accrue ALL of the payments due IOC under the IOC/Total SPA, including the very important final resource appraisal payment.
7. And, very importantly, Exxon needs the gas from E/A for, at a minimum, a third train at PNG LNG.
8. Finally, Exxon may be attempting to position itself to takeover OSH as well, which would allow them to possibly push Total out as Operator of E/A and go for multiple expansion trains at PNG LNG, with all the synergistic savings that would apply.
I believe that there is a very strong case for a superior bid from Exxon, even one that may be strong enough to make Total back off. All that being noted, my best guess is that the bid is from Exxon, and is somewhere in the range of the following:
1. 2 shares IOC for 1 share EOM (today's value of EOM is about $95, making this cash portion around $47.50 or about a 18% increase over OSH bid of $40.25). Granted that a large part of the bump in percentage is the post OSH bid bump that IOC has enjoyed. Exxon can, with ease, also offer an uncapped amount of cash to IOC shareholders rather than EOM stock. Exxon can offer this share swap easily without offending its current shareholders, as it is, at current pps amounts, nearly an even trade, share-wise.
2. US Traded CVRs for US$7.00 for each 1 tcfe over 6.2, after the drilling and testing of A7, and subsequent certification appraisal. This amounts to about a 15% increase over the OSH CVR amount. This portion of the bid may be lower, perhaps in the $6.50 range (offering only approximately a 7.5% increase over the OSH bid).
3. Exxon can also offer a floor to the CVRs that OSH did not. I believe that this floor would be between 1-2 tcfe over 6.2 tcfe (or $7-14).
Exxon could, of course, offer a full share/cash bid, but that would leave room for the IOC BOD to reject it as 'non-superior' due to the uncertainty of the forthcoming A7 well and certification appraisal.
If any of this scenario is close to reality, the ball is definitely in Total's court and, I believe, OSH could be in big trouble, because at that point Total would be better off on its own, bidding without OSH. And if OSH knows the certification numbers (with A7 results and an Exxon-selected appraisal company) will come in at around 10 tcfe, they know they will be cash-strapped to participate in Papua PNG without some significant sell-downs.
For what it's worth...
