Australia's Oil Search Ltd. agreed to a $2.2 billion deal to acquire InterOil Corp. (NYSE: IOC) on May 20, aiming to pave the way for two rival LNG projects led by global majors to work together in Papua New Guinea (PNG).
In the face of weak oil prices, PNG is considered one of the best locations for LNG projects, thanks to its high quality gas and low costs. The country has the existing PNG LNG project, run by ExxonMobil Corp. (NYSE: XOM), and the proposed Papua LNG project, run by Total SA (NYSE: TOT).
For Total, which will boost its stake in Papua LNG as part of the deal, Oil Search's move will open opportunities for collaboration and possible integration with ExxonMobil's project, said CEO Patrick Pouyanné.
"It was a deal waiting to happen, a consolidation of the joint venture," said RBC analyst Ben Wilson. "Conceptually, it makes a lot of sense and should allow them to go forward to the development phase a lot faster than otherwise would be the case."
Oil Search co-owns Papua LNG and PNG LNG and has been pushing them to cooperate in order to avoid wasting money on duplicating infrastructure as happened on Australia's east coast, where three LNG plants were built next to each other at a cost of $64 billion. The takeover of InterOil will give it a bigger stake in Total's project.
"The days of industry profligacy are past with these sorts of oil and gas prices that we're experiencing and are likely to experience for some years to come," Oil Search CEO Peter Botten told Reuters.
ExxonMobil said it was "open to discussing infrastructure sharing opportunities with other operators where it is technically feasible and commercially attractive for both parties," in an email to Reuters.
InterOil is coveted for its stake in the Elk-Antelope fields, which could hold at least 6.2 trillion cubic feet of gas, more than enough to fill one LNG processing train. Drilling of one more well this year could prove it holds much more.
InterOil CEO Michael Hesson said the company had received a number of other proposals, but declined to give details.
"I can also tell you this was the best proposal," he told a a conference call.
Oil Search is offering 8.05 of its shares for each InterOil share plus a contingent value right tied to the size of the eventual reserves in Elk-Antelope. Oil Search said the offer valued InterOil at $40.25 a share up front, a 27% premium to its close on May 19.
Oil Search said the deal could see it double its output by 2023.
"We think it's a very smart deal. It should be well supported," said Ric Ronge, a portfolio manager at Pengana Capital, which owns shares in Oil Search and Total.
Oil Search shares rose as much as 5% following the announcement.
Total Boosts PNG Stake
As part of the plan, Oil Search has agreed to sell more than half of Interoil's stake in Papua LNG to Total. As a result, Oil Search will end up with a 29% stake in the Papua LNG project, complementing its 29% stake in PNG LNG.
Total's stake in Papua LNG will increase to 48%.
The deal follows Oil Search's rejection last year of an $8 billion takeover offer from Woodside Petroleum Ltd., which wanted Oil Search for its stakes in the PNG LNG project and Elk-Antelope.
Asked if Woodside would consider a counter bid, chief executive Peter Coleman said on May 20 the company's focus was on sub-$1 billion deals.
"For us at the moment big M&A is not front of mind at all," he said at an investor briefing.
Oil Search and InterOil said they expect the deal to close in the third quarter of this year, pending approval from InterOil's shareholders.
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