The fall in oil price has provide opportunities for those with strong balance sheet to do counter cyclical deals. Woodside’s (WPL) approach of Oil Search is just one of the first major deals in the Australian energy sector.
We own position in Woodside although much smaller than Origin which has not helped performance given the weak Origin Share Price. Owning the equity is one way of gaining exposure to the oil price, another is buying the Oil ETF.
Woodside Share Price
The chart shows the year to date return of Woodside verses the market and other listed peers.
Oil Search is the first major acquisition where the payment is mostly in script. Initial approach reported payment of 0.25 WPL shares per Oil Search or 4 Oil Search for 1 WPL share.
With a low geared balance sheet, Woodside already spent up to $3.75 billion on stakes in Wheatstone and Kitimat projects. These acquisitions were accretive to earnings as cost of debt is only 2.6%. WPL could essentially fund some of the payment with cash offer rather than script.
The script for script structure of the deal could be made to appease the PNG government which owns 10% of Oil Search as well as other shareholders which do not want to sell after the oil price has fell from $100 to $45 USD per barrel.
By taking the script they could have the upside albeit shared within a larger entity. It could also use the debt capacity on balance sheet to build out the potential PNG LNG projects within Oil Search. It would also move up in the ASX Top 50 Ranking.
If Woodside succeed and with recovery in oil price, shareholders will come out with significant increase in earning and dividend. With a long project life, the ROI will still be above cost of capital once the immediate supply crunch in the next few years is passed.
There will also be other opportunities for rationalization and consolidation, where those with strong balance sheet takeover those that are under pressure with debt fuelled LNG growth.
Oil Search has a 19.8 MTPA name plate LNG train in PNG. Interestingly after the oil price falling from $100 to mid 45s. The realized price during FY15 was equivalent of mid $50s while the cost is $9 in production and $12-13 per barrel in depreciation.
Even with oil at this level, these LNG projects are generating significant free cash flow. The original sin is the debt required to fund these project in the first place.
Just like Shell takeoever of BG. Once these projects come online where the commissioning risk is derisked. It is much safer to make an offer than. The crash in the oil price since September 2014 certainly helps as well.
note: above does not show declared franking credits.
WPL Dividend Dates 2017
Final Ex-Dividend Date: 2 March 2017
Final Record Date: 3 March 2017
Final Dividend Payment Date: 29 March 2017