Angela Macdonald-Smith, 05 October 2015

Woodside Petroleum chief executive Peter Coleman feels no urgency to put forward a higher bid in the company’s $11.6 billion takeover tussle for Oil Search, or to sweeten the offer with cash.

Speaking  for the first time on Woodside’s rebuffed scrip-based approach for the Papua New Guinea oil and gas player, Mr Coleman robustly defended the one-for-four share proposal that was rejected by Oil Search’s board, which described it as with “little merit” and “grossly undervalues” the company.

It’s a criticism that is rejected by the Woodside head. “We are paying a full price on every measure,” he said on the sidelines of the Australia Korea Business Council summit in Sydney on Friday.

In an interview with Fairfax Media, Mr Coleman said he had little appetite for sweetening the proposal, which flew  in the face of reports that Woodside was testing debt markets with a view to raising $2 billion-$3 billion to raise the offer. He said the turmoil that had hit the resource equities market recently justified the substance of the initial approach.

“Offering more is dilutive to our shareholders,” he said. “We are already at that balance point and we don’t want to go any further.”

Any move to include cash in a proposed offer would mean the four-for-one scrip ratio would have to be reduced, while using cash meant taking a view on future oil prices, he said.

“In this environment cash is king.   You don’t want to be using cash. If you pay cash you are locking in a particular price outcome.”

Offering a skinny premium

Woodside’s proposal originally valued Oil Search at $7.65 a share, which was criticised as offering a skinny 13-14 per cent premium to Oil Search’s most recent close when it disclosed the approach. But news of the approach had been disclosed by Street Talk in the preceding days, and the premium looks healthier based on more traditional measures, representing a 25.9 per cent premium to the two-month volume-weighted average of Oil Search shares and 23.3 per cent on the same measure over three months.

Based on Friday’s close for Woodside of $29.54, the proposal values Oil Search at $7.38 a share, modestly higher than Oil Search’s close of $7.26.

While Oil Search’s board had refused to engage on Woodside’s approach, its main shareholders, including the Papua New Guinea government, Abu Dhabi’s International Petroleum Investment Co and Capital Group, had been keen to talk, Mr Coleman said.

“Their major shareholders are picking up the phone and talking to us,” he said.

Mr Coleman said he had a “very positive” meeting with Papua New Guinea Prime Minister Peter O’Neill, who has signalled the government would welcome Woodside’s entry into the country, and could be open to selling its about  9.8 per cent stake depending on the price.

While the PNG government paid $8.20 a share for its stake in Oil Search, and IPIC paid $8.55, that was in a much higher-price environment, when crude was trading at more than $US100 a barrel, more than double current levels. Using average broker consensus for Woodside of about $34 a share, the offer equates to $8.50, almost reaching IPIC’s investment price.

A presentation by Woodside’s adviser Bank of America Merrill Lynch also emphasises the lift that Oil Search shareholders would get in terms of dividends should a deal proceed.

Dividend would rise

Oil Search’s dividend for the first half of 2015, of US6¢ a  share, would rise to US15¢ on a pro forma basis using Woodside’s 80 per cent payout ratio, and to US21¢ for Australian tax residents, who benefit from franking credits.

Meanwhile, Oil Search’s disclosure to the market of Woodside’s confidential approach has opened the possibility of a third party entering the fray to target the PNG player, but Mr Coleman saw a “low probability others will make a better offer”.

With any scrip offer needing to involve stock listed in Port Moresby or Sydney to be acceptable for Oil Search shareholders, some sources see BHP Billiton as one of the few in a position to move, but the miner is expected to be wary of re-entering PNG. As for a cash deal, few have the $13 billion or so that could be needed, while US giant ExxonMobil, as operator of Oil Search’s key asset, the PNG LNG venture, might not want such a large chunk of the project.

The proposed bid for Oil Search triggered speculation in the market that Woodside was starting to look more negatively at prospects for Woodside’s proposed Browse floating LNG venture, the biggest expansion project in its existing portfolio. But Mr Coleman said “nothing has changed” on Browse, with work going full steam ahead on reducing the cost of the downstream liquefaction side of the project, and on marketing Woodside’s share of the LNG.

The next step in his strategy was simply to “wait – for Oil Search shareholders to start to say, ‘where’s the deal?'”, he said.

“I’m a patient man. This is a once-in-a-cycle opportunity to do something quite special.”

Extracted in full from the Sydney Morning Herald.