Shares in Australia's largest energy player surged this morning after it played down the chance of upping its takeover offer for Oil Search Limited (ASX: OSH).
Woodside Petroleum Limited (ASX: WPL) rallied 3.8% to $30.66 in late morning trade while Oil Search underperformed the sector with a 1% gain to $7.33.
The share price reaction goes to show that Woodside's $11.6 billion proposal to merge with Oil Search isn't particularly good news for shareholders in either company, at least not in its current form.
Woodside's chief Peter Coleman described the offer as a "full price on every measure" and indicated that investors should not expected a sweetened offer for Oil Search, according to the Australian Financial Review.
The 1.8% rise in the West Texas Intermediate oil price to $US45.54 a barrel overnight may be giving the sector a boost, but Woodside's big share price increase probably reflects more of a relief by shareholders that the company is resisting calls to offer more than its one-for-four share swap offer.
Speculation that Woodside is looking to raise debt so it can woo Oil Search with a cash component on top of the stock swap has not gone down well with the bidder's shareholders, and Coleman said that he can't increase the offer without the deal being dilutive to Woodside's shareholders.
Bank of America Merrill Lynch, which is advising Woodside on the takeover, pointed out that Oil Search shareholders will be getting a good deal if they considered the increased dividend payments from the merged group.
Oil Search paid an interim dividend of US6 cents a share and that will rise nearly three-fold to US15 cents on a pro forma basis assuming Woodside stuck to its 80% payout ratio.
I own shares in both companies and the arguments have not changed my view that Oil Search shareholders are not getting a good enough deal. Most investors wouldn't have bought into Oil Search because of its yield (at least not for the short to medium term) but for its 29% stake in the PNG LNG project.
That is a long-life asset that is expected to generate a healthy amount of cash for Oil Search over the coming years even with the weak energy prices.
On the other hand, Woodside doesn't have any long-life projects worth getting excited about (and certainly not the proposed Browse floating LNG project).
I bought shares in Woodside because of its healthy balance sheet, which puts it in an enviable position to buy assets on the cheap from distressed sellers.
Oil Search isn't distressed and Woodside should look elsewhere or undertake a capital return to shareholders.
I am comfortable holding Oil Search shares on the premise that it will remain a stand alone entity. But I will be disappointed if Woodside doesn't undertake a material value accretive deal over the next six months.
This is why I believe Woodside is under more pressure to do a deal than Oil Search.
Woodside is trying to convince the market that its first bid for Oil Search is the final chapter. I am not buying that.
