Could Woodside Petroleum buy Oil Search?

Oil Search's PNG LNG project could fill an important production gap for Woodside say analysts.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Oil Search (ASX: OSH) could be bought by Woodside Petroleum (ASX: WPL) for as much as US$13.1 billion according to analysts at company CIMB Securities. Oil Search is forecast to quadruple its energy production from 2015 as the PNG LNG project the company has a 29% stake in comes online. This production could fill a growth gap faced by Woodside in the medium-term brought about by delays to current projects Browse LNG and exploration in Israel.

Woodside is currently in a unique position. As one of Australia's major oil and gas producers, along with the likes of BHP Billiton (ASX: BHP) and Santos (ASX: STO), Woodside has several significant growth projects under evaluation, but the long lead times before the company's next set of projects come online means it faces a period of low capital expenditure and gushing cashflows from existing projects.

The strong cashflows are largely coming from the $14.9 billion Pluto LNG plant, which was successfully brought into production in April last year. With Pluto's help, Woodside's first quarter 2013 production increased by 55%, with sales up 50% and revenue up 21% to US$1.44 billion. With Pluto now completed, capital expenditure for the first quarter was down by 70%.

In response to the cash influx Woodside announced a special dividend of US$0.63 per share in April to distribute the earnings back to shareholders. But with the delays in upcoming projects Browse LNG and prospective exploration off the coast of Israel, an acquisition is seen by some analysts as a likely stop-gap measure to maintain growth.

According to a Bloomberg report, analysts at Commonwealth Bank (ASX: CBA) view Oil Search as being undervalued, stating that the current share price of $7.93 does not factor in the likely expansion opportunities of the PNG LNG project.

Oil Search had a market capitalization of $10.58 billion at the end of last week, so if an offer of US$13.1 billion (A$14.12 billion) was made it would represent a sizable premium to the current share price. But it could be a viable option given any new major projects for Woodside are at least five years away.

Foolish takeaway

Shares in Oil Search have increased 25% in the last 12 months, while shares in Woodside are up 10%. If Woodside elects not to look for acquisitions in the near term, shareholders will still be rewarded with strong dividends. The company is targeting a dividend payout ratio of 80% of underlying net profit after tax which is expected to be maintained for several years.

In the market for high yielding ASX shares? Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »