Oil Search price rise likely on buyout prospects

Yesterday Woodside (WPL) offered an all-share buyout for Oil Search (OSH) at a 13% premium to its Monday closing price. This deal is unlikely to be successful at this price, but has opened the door for Woodside to increase its offer or for other entrants to make an offer.

Oil Search
Source: Bloomberg

Any successful offer for Oil Search likely would need to value it at $9.00-10.00 a share, or a 30-50% premium from its Monday closing price, which is where its share price was trading in mid-2014.

There is clearly growing M&A sentiment in the energy and related sectors at the moment as we enter the lower end of the commodities cycle. It may still be a bit early to fully kick off, but quality targets are likely to be the ones most attractive to early movers. Oil Search clearly falls into this category, with its stake in the low cost and high growth potential PNG LNG Project.

If you look at some recent deals in the energy sector, you would expect any successful offer for Oil Search to be significantly higher. Shell’s buyout for BG Group earlier in the year was at a 50% premium to its share price. Overnight, Canada’s Emera offered to buy Teco Energy for a 48% premium to its share price, seeing the stock rally 25%.

A range of other entrants could be enticed to bid for Oil Search. The most obvious would be ExxonMobil who is its partner in the PNG LNG Project. Total, who operates the Papuan LNG project, could also potentially be enticed. Not to mention any other foreign oil companies, or energy-focussed private equity companies who could also be interested.

Oil Search has traditionally been a very highly priced company with its long term average P/E at 44.6, and P/B at 2.8. Even with the recent rally in the stock, its P/E is at 19.4 and P/B at 1.7, which clearly makes it a compelling target.

Oil Search does look like one of the most likely buyout targets in the energy sector on the ASX and, if any deal is to go through, its stock does seem likely to rise further.

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