Today’s Blog – Wednesday 9th September 2015

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Introduction

The Australian business media is today full of news on the Woodside Petroleum Ltd’s (WPL’s) takeover of Oil Search Ltd (OSH).

A general consensus appears to be that: the initial price offered is too low; the PNG Government is the key stakeholder; and, WPL would not have initiated discussions with OSH unless it had a plan to deal with the PNG Government.

What can this humble blog add to the media chorus?  The key points in my view:

  • The price will have to be raised materially in order to get Board support.
  • However, the OSH Board has been slow in rebuffing this initial low-ball bid – this could be because they want to take the counsel of the PNG Government first.
  • WPL’s actions support the consensus view of industry observers that its own pre-development LNG projects (Browse, Sunrise and Kitimat) are very long dated at best and certainly less robust than OSH’s LNG growth options in PNG.
  • The PNG Government is that of a developing nation – and as such it may do unexpected things as the takeover plays out over the coming months.
  • The majority of OSH’s staff will no longer be required once the deal is done – but one person who is absolutely key to the deal is OSH’s long time CEO, Peter Botten.   He could arguably kill the deal himself, given his PNG roots and relationships.  WPL must have a plan for him.
  • WPL could be considering asset deals in parallel with its approach to OSH – to complement or substitute this. STO’s PNG LNG stake and US company InterOil have been mentioned before and are obvious candidates.

We will continue to follow this one closely.

Commodity prices

Crude oil prices diverged in Europe and the US overnight, with Brent rising ~4% to US$49.36 and WTI falling a few cents to US$45.75.  However, this divergence was really just the reimposition of the more normal spread between the two following the closure of the US market on Monday.  The key impetus behind Brent’s rise was a general appreciation in stock markets (whilst in the US a number of large refineries were shut-in, voluntarily and involuntarily).

Henry Hub closed up a few cents to US$2.69.

LNG

In a recent interview in Canada’s Financial Post, a Wood Mackenzie gas expert made a gloomy prognostication on global greenfields LNG projects:

“The window of opportunity closed over six months ago for everyone, not just for Canada.”

Over on the other side of the Pacific, Rosneft boss Igor Sechin echoed the sentiment, announcing that the its Sakhalin LNG project (a different one than Gazprom/Shell’s Sakhalin-2 LNG project) would be delayed by a couple of years.

And thus the next cycle of boom and bust is being set up.

LNG should be an exciting place again, come 2020-22.  (Hopefully blogging will be highly remunerative in the meantime!).

Governments and fracking

News of a new development in the fracking wars – from the normally oil and gas industry supportive nation of Canada.  This was a victory for a First Nations group (under the jurisdiction of an environmental board) that will prevent fracking companies from taking water from a lake for the purposes of fracking.  That is, the issue was not about disposing of frack fluids, formation water, etc, but rather completely disrupting the supply chain to prevent fracking in the first place.

Company news – Santos Ltd (STO) and Origin Energy Ltd (ORG)

STO and ORG are currently the ugly children in the corner of the WPL/OSH takeover party.  A merged entity will have a market capitalisation in the region of A$40B – leaving STO (<A$5B) and ORG (<A$9B) as tiddlers in its wake.

In normal times this would lead to a quick and serious examination of a competitive response to the WPL/OSH deal through a STO/ORG merger.  However, these are not normal times and little discussion has emerged over this possibility, arguably due to:

  • Individually the companies have too much debt and collectively they would also have too much debt.
  • ORG’s Chairman is busy recruiting a new CEO for Woolworths (before he then possibly turns to recruiting a new CEO for ORG).
  • STO’s Chairman is busy being STO’s CEO and considering strategic options such as large asset sales.
  • There is no such thing as a merger – only takeovers.  Both organisations are wounded – who would drive a deal? There are no dominant shareholders to do so.
  • The optimal time for a merger would have been some years ago, when substantial synergies would have been available in combining their Queensland LNG projects.  Those synergies have largely been forfeited at the feet of the unlikely god of wanting to own and operate their own giant fridges.

Quote of the day

The market presumes that WPL has taken account of the following 2,500 year old wisdom, of Chinese general Sun Tzu, prior to making its recent approach to OSH:

“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand.”

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