Shares in Oil Search Limited (ASX: OSH) slipped to its lowest level since the takeover bid after management formally rejected Woodside Petroleum Limited's (ASX: WPL) offer to acquire the oil & gas company.
Oil Search described Woodside's $11.6 billion all-scrip offer to exchange four Oil Search shares for one of its own as "highly opportunistic" and says it "grossly undervalues" the company.
The target went on to warn that the merger would significantly alter the fundamental characteristic of an investment in Oil Search and dilute its present growth profile.
Woodside has hit back saying it is "surprised" and "disappointed" by Oil Search decision and highlighted the fact that the targets shareholders would own 31.7% of the combined entity – which is more than Oil Search's relative contribution to the group on a range of measures such as production, reserves and free cash flow.
That argument won't convince Oil Search or its shareholders on the merits of the deal. I am a shareholder of both companies and I think the offer can only be kindly described as a "low-ball" bid.
However, Oil Search is keeping the door open to a sweetened offer from Woodside even though it is unwilling to enter into negotiations at this point.
This could pave the way for other bidders to emerge with Exxon Mobil and Total touted as potential rival suitors.
Woodside's offer, which was formally announced on September 8, was priced at a 14% premium to Oil Search's share price then and some believe this premium needs to be around 30%, while others think any offer below $8.20 would fail given that the Papua New Guinea government paid that much for its 10% stake in Oil Search.
Oil Search's key asset is its stake in PNG LNG project and it reported a record half year result last month thanks to the ramp up of the liquefied natural gas project. It aims to produce 27-29 million barrels of oil equivalent this year compared to Woodside's target of 86-94 million barrels of oil equivalent.
The market doesn't believe the deal can be consummated as Oil Search's share price is trading comfortably above Woodside's offer with shares in the target falling 1.5% to $7.34 in morning trade while Woodside shed 2.8% to $27.63. At this price, Woodside's offer values Oil Search at $6.90 a pop.
But the weak outlook for the oil could complicate things for Oil Search's shareholders with Goldman Sachs warning that oil may need to drop to $US20 a barrel to clear the supply glut that is expected to persist longer than most are anticipating.
On the other hand, a lower for longer oil price could fuel a merger and acquisition feeding frenzy and it's hard to ignore Oil Search's attractiveness to major oil & gas players.
Stay tuned for "round two".
