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Australasian LNG-focused E&Ps look to add scale and depth to their resource portfolios, and strengthen their funding capabilities through recent merger consolidation wave
The full throttle mergers and acquisition (M&A) market in
2021 has swept over the Australasian LNG-focused E&Ps
(Woodside, Santos, Oil Search) in recent weeks, as the group seeks
to add scale and depth to their portfolios, and strengthen their
funding capabilities through all-stock merger arrangements. In
early August, Santos Ltd. and Oil Search Ltd. announced a merger
transaction, valuing Oil Search at A$8.9 billion (US$6.5 billion).
In the case of Santos, the deal would add significant exposure to
strategic, top-tier producing and prospective LNG projects in Papua
New Guinea (PNG LNG, Papua LNG), as well as promising oil
discoveries along the Alaskan North Slope (including the Pikka oil
development) at a value accretive price. Additionally, the
transaction jibes with the company's recent acquisition-led growth
strategy (Quadrant; ConocoPhillips' northern Australian interests),
which has been well-timed and helped the company's share price to
consistently outperform its peers and trade at a premium to our
valuation, creating equity pricing power to advance an all-stock
deal. For Oil Search, the all-stock deal offers exposure to a
sizeable but more well-balanced Australasian portfolio with more
robust cash flow generating potential, a balance sheet with greater
capacity to fund its quality growth prospects, and a stable
management team with a proven track record.
Following the Santos-Oil Search deal, Woodside Petroleum agreed
to a merger with BHP Group's upstream business in mid-August,
valuing BHP's oil and gas assets at A$18.8 billion (US$13.8
billion). While the potential merger follows the general
consolidation framework seen over the past year, it differs from
the Santos-Oil Search transaction in that the Woodside-BHP upstream
portfolios have limited shared interests, outside of the North West
Shelf (NWS) project assets and prospective Scarborough gas field,
and most of BHP's upstream portfolio would be relatively new to
Woodside. Still, we view the deal as favorable for Woodside on the
basis that it adds strength to the company's declining,
LNG-weighted reserve base, through the addition of a more diverse
set of relatively high-quality, significant cash flow-generating
assets, and creates a more attractive long-term growth portfolio
with an array of prospective large-scale deepwater projects across
Australia (Scarborough), the US Gulf of Mexico (Wildling), Mexico
(Trion), and Trinidad and Tobago (incl. Calypso). Also, we forecast
that the new entity will deliver more robust operating cash flows
and also have a stronger balance sheet, via the addition of BHP's
unlevered upstream assets, which will support the self-funding of
future growth and returns to shareholders, especially if oil prices
remain near current levels. However, the combined portfolio will
stay heavily weighted toward both oil and oil-linked LNG production
and thus remain vulnerable to future commodity price cycles. Also,
the all-stock nature of the merger will require the issuance of a
significant block of shares (at a moderate discount based on our
most recent appraised net worth) that also carry a substantial
annual dividend commitment, but it is too early to determine if the
deal will have a material impact on valuation per share.
IHS Markit Connect users can access two full reports
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