Below is an article posted on the AFR Website in the early hours...

Below is an article posted on the AFR Website in the early hours of Monday Morning. Senex shares are likely to go into Trading Holt pre open on 16/12/13

ANGELA MACDONALD-SMITH AND SARAH THOMPSON
Cooper Basin-focused Senex Energy has proposed a mostly scrip-based takeover offer for oil and gas stock AWE in a bid to create a $1.5 billion mid-cap player with growth assets in Australia and Indonesia supported by strong cash flows from more mature fields.

AWE’s board was due to meet on Sunday to consider the tentative ­proposal from Senex that is believed to value the target well below most ­analysts’ valuations.

Senex’s proposal could also involve some cash and is subject to due diligence. It is priced at less than $1.50 a share which would value AWE at $783 million, say shareholder sources that have been sounded on the deal. That is well above AWE’s last close of $1.185, but far short of Citigroup’s $2.37 a share valuation.

Senex, formerly known as Victoria Petroleum, has a market value of about $880.9 million.

AWE’s decision to make the non-binding conditional approach public, through a statement to the ASX early on Friday, took Senex by surprise. Senex is understood to have wanted to bring AWE to the table in the hope of striking a friendly deal.

Instead AWE went public with the approach, which was first revealed by afr.com on Friday, and hired UBS as a defence adviser, seemingly indicating it could embark on some competitive process, which is understood to be of little interest to Senex.

Senex, which is being advised by Citigroup, is expected to halt its shares from trading early on Monday.

Meanwhile, AWE shares may come out of a trading halt on Monday.

AWE managing director Bruce Clement didn’t return calls on Sunday, while Senex managing director Ian Davies, a former senior executive at BG Group’s Australian business, declined to comment.

The two companies have few synergies among their assets, with Senex’s small but rapidly growing onshore oil and gas business being almost completely focused on the Cooper Basin in central Australia, while AWE’s activities span the Bass Strait and the Perth Basin in Australia, New Zealand, the US and Indonesia, and are mostly offshore.

However the combination of the two would bring the benefit of AWE’s strong cash flows to a merged company with upside in unconventional resources in the Cooper Basin, in addition to AWE’s big growth asset, its share of the 100 million barrel Ande Ande Lumut oil project in Indonesia. The combined company would have a market value of about $1.5 billion, putting it firmly into the mid-cap space, just behind Beach Energy.

Senex is in the middle of a major shale exploration program in its Cooper Basin permits, acting as a major draw on its finances. It has been seeking a buyer for its coal seam gas interests in Queensland, but no deal has emerged. Gaining access to AWE’s cash flows and debt capacity would provide welcome funds for drilling and other exploration.

Analysts voiced surprise at Senex’s approach. “It’s a pretty significant departure from where Senex has been positioning itself, which is Cooper Basin oil and gas with this unconventional overlay,” said Ord Minnett energy analyst John Young.

“Senex would be very reliant on retaining AWE personnel for that to be successful.”

Senex is understood to be keen to retain much of AWE’s management should a deal proceed and would also bring some AWE directors onto a merged board.

However, valuation is expected to be a major obstacle to any deal. Despite AWE’s languishing share price, most analysts value the stock at more than $2 a share. The lack of synergies between the assets and the uncertainty of the growth prospects for Senex’s unconventional business could also raise questions on the merits of a merger.

“It doesn’t seem compelling why AWE and its investors would necessarily support a deal,” Mr Young said. “A merger gives scale but what else other than size does it necessarily provide?”

One investor said AWE was unprepared for the approach and Senex’s move had caught the company, chaired by Bruce Phillips, on the hop.

“They are very lucky it’s a silly offer. If it had been a $1.75 a share ­unconditional cash bid they were gone in a heartbeat.”

Sources said the approach from Senex also indicated the cost and time involved with shale drilling and development.

“Senex’s oil is attractive but each field is small and it’s like a rat on a wheel since they have to keep finding new ­discoveries, and so it needs access to AWE’s cash flow and debt capacity,” one said.

“This is implicit acknowledgement that shale is really hard, expensive and time consuming. It also calls into question whether the myriad small caps like Armour Energy and others can be successful standalone. I think unlikely.”