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Oil and gas M&A heats up in Australia and PNG

October 26, 2015
News

More than a year after oil prices started to tank, it looks like the Australian and Papua New Guinea markets are poised for a period of serious merger and acquisition activity.

The latest round of maneuvering was kicked off in September by Woodside Petroleum, Australia’s biggest listed oil and gas producer, when it launched an A$11.6 billion ($8.4 billion) takeover bid for Papua New Guinea-based Oil Search. Woodside offered one of its own shares for every four held in Oil Search, which is also listed in Australia, in a proposal that the target and local analysts immediately dismissed as low-ball.

Woodside’s interest in Oil Search centers on its plum LNG assets, particularly its 29% stake in the over-performing PNG LNG project, operated by ExxonMobil. PNG LNG started up several months ahead of schedule in April 2014 and since then has exceeded expectations, operating at a rate of 7.4 million mt/year during the third quarter, well above its nameplate capacity of 6.9 million mt/year.

Oil Search is also a 22.8% stakeholder in Papua New Guinea’s potentially massive Elk-Antelope gas field, which is being appraised for development to feed the proposed Papua LNG project, operated and 40.1% held by Total. Papua LNG is also expected to produce from two trains, with a final investment decision on the project being targeted for 2017.

Woodside’s overtures, however, have been firmly rejected by Oil Search, whose managing director Peter Botten this week said the offer was ‘highly opportunistic’ and ‘grossly undervalued’ the company. Botten added that Oil Search’s board saw very few synergies with Woodside, with which it has no asset overlap.

Woodside CEO Peter Coleman has so far indicated he has little appetite to raise the bid, which valued Oil Search at A$7.65/share. Despite this, analysts have pointed to the possibility that the offer could be hiked to around A$9.00/share, or that another major, most likely ExxonMobil, could step in.

Market observers are also suggesting that should Woodside walk away from Oil Search, it could find a cheaper option in US-listed InterOil, owner of a 36.5% stake in Papua LNG. InterOil is currently capitalized at just under $2 billion and is also thought to be of interest to Papua LNG operator Total.

Meanwhile Santos, Australia’s second-largest E&P company, has become the subject of what would be one of the oil sector’s biggest-ever private equity takeovers. Investment fund Scepter Partners, which has links to the royal families of Brunei and the United Arab Emirates, on October 20 surprised the market by lobbing a A$7.14 billion offer at Santos.

The offer of A$6.88/share is regarded as a realistic opening salvo that is likely to lead to a deal being done, possibly in the region of A$7.50/share. At that price, Santos would be sold for around A$7.8 billion.

Like Oil Search, Santos has rejected the offer, but the company is in a weakened position, having seen its share price plummet from more than A$15.00 in early September 2014 to below A$4.00 on September 30 this year. The crash in oil prices has also meant Santos’ debt has ballooned, with analysts expecting it to top A$9 billion by 2016.

While side-stepping Scepter, Santos is pressing ahead with a strategic review that it launched in August. In addition to considering asset sales as part of the review, the company has so far announced plans to cut 756 employees from the 3,636 it had at the end of last year.

There’s also been an upturn in M&A activity among Australia’s junior players. This week Beach Energy and Drillsearch Energy unveiled plans for an all-scrip merger which would create a mid-cap oil and gas producer valued at around A$1.17 billion and with production of 12.1 million boe.

The deal, set to be completed next February, would combine the two companies’ overlapping assets in central Australia’s Cooper Basin, providing cost savings of around A$20 million annually.

Chinese interest has also emerged among local juniors. Landbridge, a privately owned Chinese group which in 2014 acquired Queensland-based coalseam gas company WestSide, earlier this month scuttled a proposed farm-in deal between Armour Energy and US shale pioneer Aubrey McClendon’s American Energy Partners.

Landbridge swooped on Armour with an A$0.08/share improvement on an initial A$0.12/share offer, securing the company’s acceptance for a total of just over $60 million. The offer swept aside an earlier agreement which would have seen AEP invest up to $130 million exploring Armour’s McArthur Basin tenements in central Australia over the next five years, with a view to earning a 75% stake in the massive area.

With those two deals all but done, interest is now centering on potential plays for other small onshore producers such as Cooper Energy and Strike Energy.

But the main game for now is Santos and the Papua New Guinea LNG sector. That’s where the big deals look to be coming.

By Christine Forster

Source: Oil Voice

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