Oil Search (ASX:OSH) shares undervalued in Santos merger: expert

Here’s why Oil Search is in the headlines this morning.

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A Santos oil and gas worker wearing a hard hat stands in a yellow field looking at blueprints with an oil rig and blue sky in the background

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The Oil Search Ltd (ASX: OSH) share price is gaining today amid reports surrounding an independent expert’s determination that the company deserves a bigger stake in its $23 billion merger with Santos Ltd (ASX: STO).

Reports have emerged this morning claiming Oil Search fronted Santos following the expert’s advice, intending to increase its stake in the company born from the transaction. However, Santos reportedly shot down the assertion.

At the time of writing, the Oil Search share price is $4.235, 0.83% higher than its previous closing price.

For context, the S&P/ASX 200 Index (ASX: XJO) is up 0.93% right now.

Let’s take a look at why Oil Search is in the headlines this morning.

Expert finds Oil Search to bring more than it takes

The Oil Search share price is gaining today amid reports the company attempted to push Santos to implement independent expert Grant Samuel & Associates’ recommendations.

Yesterday, the merger of Santos and Oil Search received the initial go ahead from the National Court of Papua New Guinea. Following the court’s determination, Oil Search released an update on its planned merger with Santos.

Within the update was a report by Grant Samuel. It stated that the merger is in the best interests of Oil Search shareholders, but isn’t reflective of the company’s underlying value:

“Oil Search shareholders are contributing around 43-44% of the aggregate estimated underlying value of the merged group compared to the 38.5% of the merged group that they will receive,” it said.

Oil Search also commented in the update. It noted, while the expert found that the company’s shareholders are contributing more to the merged entity than they will receive, the merger comes with “significant strategic, commercial, and funding benefits”.

Indeed, Grant Samuel’s report stated:

The options to maximise the value realised for Pikka and, over time, to optimise the development of its PNG interests are significant benefits of the merger that are not available to Oil Search [by itself]… [and] Oil Search faces real challenges in funding its growth opportunities on a standalone basis.

However, according to reporting by The Australian, Oil Search put the expert’s report to Santos in an attempt to boost its holding in the merged entity. Santos reportedly refused to bargain on the merger terms.

Additionally, the publication states that some of the company’s shareholders are wary of the deal. Thus, the expert’s comments might fan existing fears.

Allan Gray is said to be one such cautious shareholder. The investment group reportedly holds nearly 5% of Oil Search’s stock.

To get the merger across the line, at least 75% of Oil Search’s shareholders need to vote in favour.

Oil Search share price snapshot

When the merger was first put on the table, it valued Oil Search’s shares at around $4.06 a piece.

That’s an 11% premium on Oil Search’s stock’s closing price the day before the announcement of the merger.

Since then, the Oil Search share price has gained 15%. It’s also 14% higher than it was at the start of 2021.

Should you invest $1,000 in Oil Search right now?

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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