Opportunistic Woodside slapped with a wet fish

WoodsideWoodside have been sent a firm “No” in response to their offer of Woodside scrip for all the issued shares  in Oil Search Limited. The 1 for 4 share merger proposal, while at a premium to recent short term pricing metrics, proposed to merge the two companies giving Woodside a growth asset and Oil Search holders paper in a larger and more diverse business.

Quest portfolios own both Oil Search and Woodside shares however our Oil Search exposure is more than double that of Woodside.

The proposal has fallen flat with Oil Search refusing to engage on the basis that the proposal is “highly opportunistic” and of “little merit”.

Quest has been a shareholder of Oil Search on behalf of clients for many years now. We have watched the $19 billion PNG LNG project, operated by Exxon, move from a concept to reality with first shipments of LNG leaving the PNG terminal on 24th May 2014 on the Spirit of Hela bound for Asia.

Woodside shareholders must now be shaking their collective heads over this non deal.  Whilst the proposal was at a healthy premium to recent prices, recent prices are at a cyclical low, which immediately places the offer in the opportunistic basket. Post the offer, Woodside appear to have been out manoeuvred by the Oil Search team. While Woodside flew across the country to meet CEO Peter Botten, the Oil Search team were in the USA talking to shareholders. The meeting did not happen. At this stage Woodside appear very much alone on the dance floor. Woodside has now traded below $28 having been above $35 (cum div) at the end of July 2015.

Woodside are now in a tricky spot. They can give up and walk away. Alternatively, Woodside come back again and  force engagement by moving to a hostile offer and add  a cash component. This action would put further pressure on the Woodside share price but it would force engagement and see Oil Search deliver a Target Statement. This action does however cast doubt on the wisdom of recently paying out 80% of earnings as dividends as they have less fire power for a decisive bid. There is a chance that another player steps in; Exxon the project operator being the obvious candidate. There is also the possibility that Woodside turn to the stake in PNG LNG held by the highly stressed Santos but again existing pre-emptives would make that a tough ask.

Whatever happens, it is our view that unless Woodside work towards a price above $9 including a cash component, this offer will fail.

The ball is very much in Woodside’s court this week.