The bet you have when not betting
SOME years ago, in a casino somewhere across Australia, I watched a punter repeatedly and diligently place a $100 chip on red and another $100 chip on black at every spin.
One of the bets was guaranteed to win $100; the other was guaranteed to lose $100. It was what could accurately be called “the puntless punt”.
And that is exactly what Woodside Petroleum is doing with its all-paper bid for Oil Search. It might win on “black” (ahem, gold) – the oil price rockets back to, say, $US100. But it or rather its shareholders would also lose an almost exactly equivalent amount t on “red”.
Wood- side and itss shareholders would pick up (most of) f) the benefit of the increased d value of Oil il Search’s assets; but they would also o now have to o give a sizeable e slice of the in- creased value of Woodside’s assets to all those ex-Oil Search holders.
Equally, if they lost on “black” – the oil price plunged to, say, $US30 – that loss would be mitigated by those ex-Oil Search holders now picking up a sizeable slice of the fall in the Woodside-original assets.
Now my original characterisation of the “puntless punt” was not exactly accurate. If the wheel spins and lands on zero – theoretically every 37th time – the casino punter would lose on both bets.
Woodside doesn’t really face a total “zero result” in its punt on Papua New Guinealocated Oil Search, but it would take on a different and significant country risk. And that “zero result” is possible, if not in “37 spins”, maybe say, in the equivalent of 100 spins.
But setting aside countryrisk issues, the central point about Woodside’s all-paper bid for Oil Search is precisely that it is not a punt on the oil price.
It might seem like Woodside has set out to buy oil and gas assets while they are cheap, while the oil price is low, but it’s not. That would only be the case if it was paying cash.
Then it really would be punting. If the oil price soared, if it had paid cash, it would have b o u g h t Oil Search and its as assets cheap: all th the benefit would fl flow in a (debt) le leveraged way to an and only to its exis isting shareh holders.
Equally, if the oi oil price plunged, al all the loss on w what it had paid fo for what would th then have tu turned out to be ov overvalued Oil Se Search assets, w would be incurred by and only by – and leveraged to – its shareholders.
Now there is a small quibble which does put some “punt” into the otherwise “puntless punt”. That’s if it’s true that Oil Search’s production costs are lower and if it has a better suite of exploration assets.
Bottom line, we are seeing an exercise in corporate gigantism – to get bigger just for “big’s sake”. And to p--s off, literally and metaphorically, the biggest Woodside shareholder, Shell.