Chelsea Oil and Gas Ltd. (fka COGLF)

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Woodside Drops $8.4 Billion Bid for Rival Oil Search

12/07/2015 | 08:45pm US/Eastern
MELBOURNE, Australia?Woodside Petroleum Ltd. abandoned its attempt to create a regional oil-and-gas champion with the purchase of rival Oil Search Ltd., leaving the region's energy industry with a moribund deal market even as oil prices approached seven-year lows.

In a brief statement Tuesday, the Australian energy company said it had informed Oil Search's board that it had withdrawn its proposal to acquire the company in an all-stock deal valued at the time at 11.6 billion Australian dollars (US$8.4 billion). The Papua New Guinea-based company had already rejected the offer, made in early September, as too low.

Oil Search on Tuesday reiterated that it believed the proposal "grossly undervalued" the company.

A takeover of Oil Search promised needed growth for Woodside and a foothold in the poor nation of Papua New Guinea, which is viewed in the industry as one of the lowest-cost areas for developing liquefied-natural-gas projects.

It also held out the promise of a surge in merger-and-acquisition activity in the region, where many financially stretched companies are viewed as possible sellers or targets. There have been few sizable transactions in the industry since Royal Dutch Shell PLC in April agreed to a US$70 billion deal for BG Group PLC.

The lack of M&A suggests companies don't believe oil prices are yet near to bottoming, particularly after Saudi Arabia and the Organization of the Petroleum Exporting Countries last week again declined to reduce their near-record production of crude, said Neil Beveridge, a senior analyst at Sanford C. Bernstein in Hong Kong. "I think buyers, like investors, are trying to time the bottom of the market, and the latest data would say there is still another six to 12 months of oversupply to come," he said. "Companies will prefer to wait and see if they can pick up bargains down the road rather than do deals today."

Industry executives have said there remains a gap in asset valuations between potential suitors and targets as oil prices continue to slide. Australia's Santos Ltd. last month opted against selling assets, despite fielding bids, and instead offered new shares and brought on board a Chinese private-equity investor as a shareholder to raise A$3.5 billion to help slash its debt burden. A month earlier, Santos had rejected as too low a A$7.14 billion takeover offer from Bermuda-based Scepter Partners?a buyout firm backed by sovereign investors and wealthy members of Asian and Gulf-based ruling families?yet since then the energy company's shares have continued to fall, leaving it with a market value of A$4.67 billion.

One of the region's few deals to get off the ground recently has been Beach Energy Ltd.'s agreement to acquire Drillsearch Energy Ltd. in an all-stock transaction. The deal offers the two midtier producers, already closely linked by existing partnerships, scale and a strengthened balance sheet.

On Tuesday, Woodside closed the door to any other arrangement with Oil Search, saying it wasn't pursuing any alternative transactions to combine the two businesses. Woodside Chief Executive Peter Coleman had previously said its offer for Oil Search was fair and fully priced.

Oil Search's main asset is a 29% stake in a US$19 billion liquefied-natural-gas development in Papua New Guinea known as PNG LNG, which is led by Exxon Mobil Corp. It is involved in other gas fields in the South Pacific nation, including a project being developed in partnership with Total SA of France. Any takeover of Oil Search would rely on approval from shareholders that include Papua New Guinea's government, which owns an almost 10% stake in the company.

For Woodside, the deal would have increased its bet on natural gas and the continuing growth in Asia's appetite for cleaner-burning fuels at a time of low prices.

The proposal was also viewed by some analysts as a solution to Woodside's struggle to expand its reserves and production levels after repeated delays of an investment decision on the massive Browse LNG project off Australia's coast, and last year's call to abandon a planned US$2.5 billion investment in the Leviathan natural-gas discovery off Israel's coast.

Investment bank Macquarie, in a report to clients, said the success of Woodside's growth ambitions now rested on the possible development of Browse, a technically complex project. Woodside has said it aims to make a final investment decision on Browse in the second half of 2016, although it has yet to confirm it can achieve the cost-cutting needed to ensure the project is economically viable.

Mark Samter, an analyst at Credit Suisse in Sydney, this week said the most sensible thing Woodside could do with its capital was buy back its own stock, since any raised offer for Oil Search would have destroyed value for the energy company.

Uncertainty over whether Woodside would raise its bid had weighed on its share price, which by Monday had fallen by about 10% since the offer was disclosed, while Oil Search had risen around 13% in that time. On Tuesday, Woodside's shares slid 4%, faring slightly better than the wider industry on the Australian market, while Oil Search dropped by 16%.

Write to Robb M. Stewart at [e-mail]

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