The diverging pathways of two top oil companies

THE problem with being best at anything is that immediately after you win the title everyone wants to knock you off. This is what Slugcatcher thinks might be happening in the Australian oil patch where a pretender is emerging, Oil Search.
The diverging pathways of two top oil companies The diverging pathways of two top oil companies The diverging pathways of two top oil companies The diverging pathways of two top oil companies The diverging pathways of two top oil companies

Today's top dog, Woodside Petroleum, is still the clear leader, as measured by stock-market value.

At $33.1 billion Woodside is worth more than Oil Search and Santos combined with their respective $13.1 billion and $12.5 billion falling short by $5.5 billion.

Oil Search on its own hardly qualifies as pretender, until you consider two interesting facts.

Firstly, a comparison of share price shows that Woodside has been losing ground over the past five years while Oil Search has been rising strongly.

Secondly, last week's strategy day at Oil Search turned out to be more than an occasion for the Papua New Guinea focussed company to display its wares. It became a chance for at least one cheeky investment banker to compare the outlook for Oil Search and Woodside.

The result of that comparison, albeit buried in the detail of a Macquarie bank report, was enlightening because even with the albatross of PNG's notorious corruption hanging around its neck, Oil Search was seen as being a business handling growth opportunities better than Woodside.

Share prices first - because they tell much of the story.

On this day five years ago Woodside was trading at $50.11 and Oil Search was trading at $6.09. It is incorrect to say that in late 2009 Woodside was worth eight-times Oil Search because that does not take into consideration the number of shares on issue.

However, the share price is a starting point because when you look at the two stocks today Woodside's share price has slipped to $40.05 and Oil Search's share price has risen to $8.61 - a snapshot measure showing how the gap has been narrowing.

On a percentage basis Oil Search is up 41%, Woodside has fallen by 25%.

When graphed together the divergence point can be seen as sometime in June 2010, when Oil Search started to rise steadily and Woodside dipped and then flat-lined - with the flat-lining more about investors chasing dividends than backing Woodside as a growth story.

It is stating the obvious to say the situation cannot continue along the same trend lines. If Oil Search keeps growing, which is what analysts who attended the company's strategy day believe will continue, and Woodside fails to find a viable growth option, the top dog title will be handed to the pretender.

Whether this will actually happen is anyone's guess but there is no doubt that investors, and their bank advisers, are becoming impatient with Woodside as it flops from one failed growth option to another.

Oil Search, however, is winning favour from investment banks with a blizzard of positive research reports published after last week's strategy day.

JP Morgan praised Oil Search for maintaining its focus on PNG despite the difficulties of doing business in that country. Credit Suisse said the name of the Oil Search game was stability, adding that "when it comes to exploration and production, predictability is your friend".

Citi praised Oil Search for delivering growth and dismissed recent criticism by investment advisers to the Australian National University, which added the company to a list of business it said caused "social harm" - a curious thing to say to a company that not only creates jobs in PNG but ranks as the second biggest healthcare provider in PNG.

Macquarie added its praise, plus an outperform investment tip despite erratic movements in oil and gas prices, before delivering what Woodside management will either consider unfair comparisons or snide asides.

What MacBank likes about Oil Search is the focus on what it owns and the expansion options that include another two (and possibly three) LNG production trains, rather than mimicking Woodside by chasing opportunities elsewhere that never seem to crystallise.

"It was re-assuring," MacBank said after the Oil Search strategy day, "to see management treating PNG LNG cash flow with the respect it deserves.

"Indeed, rather than squandering the company's new found wealth on far flung acquisitions, management will instead pay higher dividends and reinvest back into high returning growth in PNG where the company enjoys genuine competitive advantage."

As for Woodside, the MacBank team noted how it was: "seemingly being forced into acquisitions in order to generate top quartile returns, which has proven difficult historically, indeed, as Leviathan (in Israeli waters) demonstrated, even in the early stages assets in geopolitically risky locations don't come cheap".

There is no question that Woodside remains the top dog in Australian oil and gas, but there is a snappy puppy called Oil Search nipping at its heels.


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