AWE In Play

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Oil and gas explorer AWE has landed a second bid in as many days, with Mineral Resources revealing its hand with an all-scrip offer.

-Mineral Resources plans to vertically integrate its energy supply
-AWE's Waitsia is a much sought-after asset
-Perth Basin may be on the verge of a renaissance as the oil market recovers
 

By Eva Brocklehurst

Corporate interest in oil & gas explorer AWE Ltd ((AWE)) has been heightened, with a further bid emerging following the offer from China Energy Reserve and Chemical (CERCG). Mineral Resources ((MIN)) has confirmed an all-scrip offer through a scheme of arrangement.

AWE shareholders are offered one Mineral Resources share for every 22.325 shares held. This values AWE at $0.80 a share as of the close on December 8 and would result in AWE shareholders owning approximately 13.1% of the combined group.

Mineral Resources is interested in the company in order to vertically integrate its energy supply chain, having commented on this several times in presentations. Deutsche Bank notes the company does not currently intend to sell any gas from the AWE Waitsia project offshore, as it is committed to supplying domestic gas in Australia and remains a large consumer of domestic gas.

While there are no FIRB approval conditions, as opposed to the bid by CERCG, this bid still has to be weighed up against the cash offer from the latter.

Although AWE has undeveloped Western Australian gas assets, they are not close to Mineral Resources' Wodgina, so Morgan Stanley suggests there could be opportunities to swap assets with other northern gas producers. Given WA is currently long gas, the broker suspects the timing of the bid is a combination of opportunism and strategic analysis.

Still, the market's reaction to Mineral Resources' offer makes it clear to the broker there are doubts, as it has lost around -$274m in market capitalisation, 57% of the offer for AWE equity. Morgan Stanley calculates a valuation gap has opened and, hence, retains an Outperform rating on MIN.

Citi suggests shareholders should evaluate any further interest emerging in the stock in coming weeks and, ultimately, they will need to review any final offer relative to what value current management can deliver. While the broker envisages potential for blue-sky valuation up to $1.01 per share, management is expected to be able to unlock only $0.77 of this value over the coming 18 months. Although the two competitive bids are enticing, Citi doubts an acquirer would pay away all the upside.

Moreover, there is significant downside if the bids are not completed and share prices revert to recent trading levels. If the deals fall over shareholders will need to trust management to deliver full value from Waitsia despite the risks around execution. The broker suspects Santa will not reward shareholders this close to Christmas for sitting around awaiting another offer that is higher than the current share price, and downgrades AWE to Sell/High Risk from Neutral/High Risk.

Potential In AWE

AWE is an early-stage opportunity and Morgan Stanley assesses two projects, Waitsia and Ande Ande Lumut in Indonesia, underpin more than 80% of estimated valuation, and both are 50% owned. This adds to the complexity of the projects proceeding, although they are somewhat de-risked as both counterparties have oil & gas experience. Whether Mineral Resources could sell down its stake, especially the Indonesian asset, remains to be seen.

Nevertheless, Morgan Stanley acknowledges that Waitsia is regarded as the largest onshore conventional gas discovery in Australia, making it a sought-after asset. Although expecting Mineral Resources to be disciplined in its approach, the possibility of a bidding war exists, particularly as its stock has fallen -82% since December 11.

This implies the offer price for AWE is now around $0.73 per share, adding the risk that Mineral Resources may have to increase its offer. Moreover the broker's oil & gas analysts expects the market in WA to get tighter from 2020, which could justify Mineral Resources taking on additional implementation risk.

CERCG

DJ Carmichael notes CERCG is keen to acquire the company's share of Waitsia as well as obtain the operatorship. The balance of the field is owned by Beach Energy's ((BPT)) Lattice Energy. CERCG made its offer, upwardly revised after the AWE board knocked back its first approach, directly to shareholders, thereby making the bid hostile. The bid is $0.73 a share.

CERCG stated that shareholders have encouraged it to bypass the AWE board, which the researcher suspects could mean there is support for the bid amongst the share register. Waitsia is material for WA because of its potential size and, until now, it appears AWE has not been able to maximise that potential.

DJ Carmichael believes the market has been frustrated by the inability of management to secure a meaningful gas sales agreement with a customer in WA. The researcher is also of the opinion that the Perth Basin is on the verge of a renaissance as the oil market recovers. While not reflecting on the play by Mineral Resources, DJ Carmichael also notes its recent seizure of regional assets from Empire Oil & Gas, which recently entered voluntary administration.

AWE has two Sell ratings, two Hold and one Buy (Credit Suisse, yet to comment on the bid) on the FNArena database. The consensus target is $0.57, signalling -30.0% downside to the last share price. Targets range from $0.45 to $0.72.

Mineral Resources has two Buy and one Hold (Deutsche Bank, yet to comment on the bid) on the database. The consensus target is $19.43, signalling 17.8% upside to the last share price. The dividend yield on consensus forecasts for FY18 and FY19 is 4.1% and 6.1% respectively.
 

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