There's rarely a dull moment on the ASX, and whether an event is good or bad depends on where you have your money. Two stocks to watch this week are Leighton Holdings (ASX: LEI) and Oil Search (ASX: OSH), with Leighton still under a takeover offer and Oil Search shareholders being diluted by shares issued to the Papua New Guinean government.
Leighton Holdings
The takeover from Spanish-owned Hochtief AG appears to be turning nasty, with Leighton's COO and CEO resigning both from their board position and as directors in the company. Three more directors are to depart no later than the 2014 AGM, with all resigning directors set to be replaced by Spanish executives.
A statement from new CEO Marcelino Fernández Verdes, welcoming the challenge to lead Leighton and improve performance for all Leighton shareholders, was bland and unenlightening to say the least.
A complete changeover in management is always worth examining, and incoming Spanish directors may experience significant difficulties assimilating into the culture at Leighton, whose work and employees are predominantly Australian. Leighton's new CEO is also the CEO of Hochtief, and it is uncertain just how he will manage his dual portfolio.
Investors appear to share my uncertainty, with Leighton dropping 10% from $23 to its current price of ~$20.65 over the past week. Leighton is still pretty close to a 52-week high and I would suggest that investors who are uncertain about the future take the opportunity to reduce their stake while the price is elevated.
Oil Search
Investors have taken the dilution of their shareholdings quite well, considering the PNG government's recent purchase of a 10.1%, 149 million-share stake in Oil Search for AU $1.24 billion. In a company that is already overvalued, I expect the issue of more shares will delay even further the day when shareholders can expect to receive reasonable dividend returns from their stake.
The ownership of a 10% stake by the government of PNG also adds some risk to the future, particularly given the share purchase was funded by foreign-currency debt. Should PNG struggle to meet repayments, if its currency or economy weakens, or if the political situation changes, Oil Search could see 10% of its shares come on the market in short order, which would not be good for its share price.
The debt taken on by Papua New Guinea is considerable, and in fact breaches that nation's constitution and Fiscal Responsibilities Act, which limits the amount of foreign debt. The interest on a $1.2 billion loan is also likely to be a considerable portion of PNG's estimated $4.4 billion AU budget for this year (Oil Search's measly dividends definitely won't cover it).
Investors should watch for any major owners quietly reducing their shareholdings in Oil Search, as this may indicate it is prudent for you to do the same. UBS has already sold its 7% stake, however I believe this is more due to a conflict of interest (UBS is the bank that funded PNG's Oil Search acquisition) than anything else.
Foolish takeaway
The change in Leighton management could signal a new era in the company, or it could herald future struggles as Hochtief appoints more foreign executives to the board. For now I think that Leighton shareholders may want to consider taking some of their money from the table until things stabilise.
For Oil Search owners, now is not the time to sell – not with the company completing construction of its vaunted LNG plant this year. You should finally be seeing some earnings growth to justify that exorbitant 60 P/E ratio. However the addition of PNG debt and political manoeuvring to the equation does raise some additional potential pricing risk further down the track which you should be aware of.
