roc rolls with the merger punches

Roc rolls with the merger punches

TIM BOREHAM THE AUSTRALIAN APRIL 30, 2014 12:00AM

IN an industry prezzo in mid-March, Roc’s top brass boasted the oil and gas junior’s credentials as a low-cost producer with balance-sheet firepower and a “clear” and “focused” growth strategy.

Seven weeks later, the sector stalwart has acceded to a “merger of equals” with the similarly Asian-focused but bigger Horizon, with Roc emerging with a less-than-equal 42 per cent share.

Roc chair Mike Harding now argues a stand-alone Roc could not invest heavily in exploration and was vulnerable to overpaying for assets. In other words, it was caught between a rock and a hard place.

A quirk of the deal is that given it’s based on Roc acquiring Horizon shares in a scheme of ­arrangement, Roc holders don’t get to vote on the transaction. And one of them with more sway than most — fundie and 20 per cent Roc holder Allan Gray — was less than chuffed yesterday.

Harding swears the deal is ­“absolutely the right thing to do’’, creating a scale entity with a nominal $800 million market cap.

The deal was inked only after Horizon last week won assent from the PNG government to develop its $US300m ($324m) Stanley gas condensate project.

According to the proponents, Roc/Horizon should be valued on the loftier earnings multiples other Asian-centric operators ­attract.

“If rerated to no more (than the industry multiple) in calendar 2014 we would expect significant value uplift to $1 billion,’’ says Horizon CEO Brent Emmett.

With assets in NZ, PNG, Malaysia and Myanmar, the merged entity stretches the “pan-Asian” concept. But in the long term it’s all about our gaseous near neighbour, with the PNG field accounting for 45 per cent of the resource base and driving earnings when gas flows in five years.

Still, the proposal doesn’t entirely lack merit, even if it’s just eradicating Roc’s listed overheads and sending the board to Centrelink.

It’s just that the vaunted valuation uplift sounds like a glib line from the M&A textbook.

Still, the hydrocarbon cognoscenti were supportive of the union, with Morgan Stanley citing the lack of listed mid-tier oil opportunities.

With forecast output of five million barrels in 2014, the merged group would be second only to Beach Energy.

Broker BBY says there’s the lure of near-term dividends by employing Roc’s $US34m of unused franking credits.

Both stocks dipped after resuming trading yesterday. Given they have lagged the market, we see little downside and ascribe a spec buy as both boards sell the proposal to the sceptics.

Disenfranchised Roc holders are free to vent at Roc’s next — and, presumably, swan song — AGM on May 27.