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Oil Search Seen Tempting Asia’s Top Energy Deal: Real M&A

Oil Search Ltd. Seen Tempting Largest Asia Energy Deal
This is an undated company photograph of an oil exporting pipeline at an Oil Search Ltd. processing facility in Mananda, Papua New Guinea. Source: Oil Search Ltd. via Bloomberg

The fastest revenue growth in the oil industry is putting Papua New Guinea’s Oil Search Ltd. in line for another record -- Asia’s largest energy takeover.

The company’s liquefied natural gas venture with Exxon Mobil Corp. -- called PNG LNG -- starts shipments to Asia next year. The project will help Port Moresby-based Oil Search increase revenue by 234 percent through 2015, outpacing every other oil and gas explorer with a market value of more than $10 billion, analysts’ estimates compiled by Bloomberg show. While it’s pushed Oil Search’s shares to a record in Sydney, the stock still isn’t reflecting the potential for the project’s likely expansion, said Commonwealth Bank of Australia.

Exxon, the world’s largest oil company, and Paris-based Total SA, which is exploring for more gas supplies with Oil Search, are potential acquirers, Sanford C. Bernstein & Co. said. Woodside Petroleum Ltd., Australia’s second-biggest oil producer, could pay as much as $13.1 billion for Oil Search to help boost production while its own LNG projects face delays, CIMB Securities said. That’s 24 percent more than the company’s current market value and would be the biggest energy deal in Asia on record, according to data compiled by Bloomberg.

“It would make an attractive takeover target,” Neil Beveridge, a Hong Kong-based oil and gas analyst at Bernstein, said in a telephone interview. “You’ve got the PNG LNG project starting up next year, which will spin off a lot of cash for the company, and you’ve still got an exciting exploration portfolio.”

Asian Customers

Oil Search Managing Director Peter Botten wasn’t available to comment on a potential sale, Ann Diamant, the company’s investor relations manager in Sydney, said in an e-mail.

The $19 billion PNG LNG project, operated by Exxon, is one of eight ventures being built in Australia and Papua New Guinea aimed at feeding Asia’s rising demand for natural gas. Expected to produce 6.9 million metric tons of LNG annually from two so-called trains, or processing units, the project will more than double Papua New Guinea’s gross domestic product, Oil Search says.

The output is already contracted to customers including China Petroleum & Chemical Corp. and Tokyo Electric Power Co.

The venture is on track to start the deliveries in 2014, Exxon said in March. Oil Search, operating in Papua New Guinea for more than eight decades, owns 29 percent of the project, while Exxon holds 33.2 percent. Santos Ltd., JX Nippon Oil & Gas Exploration, and the Papua New Guinea government are also among the partners.

Hurdles Overcome

Companies may be interested in buying Oil Search since the project has overcome hurdles to any development in Papua New Guinea, including winning support from the government and local communities, and is more than 80 percent complete, said Chris Cahill, a manager at Quest Asset Partners in Sydney, which oversees A$1.8 billion ($1.8 billion) and has owned Oil Search shares for about four years.

“This is a high-capex, long-term project that’s about to start delivering its first cash flows,” Cahill said by phone. “There are plenty of parties that could be interested.”

Today, shares of Oil Search were unchanged at A$8.09 after earlier rising as much as 1.5 percent. Australia’s benchmark S&P/ASX 200 Index fell 2 percent.

Global LNG demand is forecast to rise as much as five times to 500 million tons a year in 2025 from 2000, according to Royal Dutch Shell Plc, Europe’s largest oil company. That has suppliers in Australia and Papua New Guinea facing increasing competition from countries including the U.S., Canada and Mozambique.

Quadrupling Output

Osaka Gas Co. today reached a $204 million partnership deal with Horizon Oil Ltd. to develop fields for a potential LNG project in Papua New Guinea, according to a statement.

Still, with the PNG LNG project online, Oil Search’s output will quadruple to 25.6 million barrels of oil equivalent in 2015 from 6.4 million this year, Goldman Sachs Group Inc. estimated in a report last month. Production may reach 35.6 million barrels in 2020, according to Goldman.

Revenue is projected to rise 234 percent to $2.42 billion by 2015, from $725 million in 2012, faster growth than any of the 33 other exploration and production companies with a market value of over $10 billion for which estimates are available, data compiled by Bloomberg show. The group, on average, is projected for 49 percent sales growth, the data show.

‘Very Attractive’

The potential has helped drive Oil Search’s Sydney-traded shares to a record close of A$8.09 yesterday, giving the company a market value of A$10.8 billion. Still, investors aren’t considering the potential for expansion of the PNG LNG project, according to Commonwealth Bank’s Luke Smith and Lachlan Cuskelly.

Oil Search’s existing operations and the stake in the PNG LNG project are worth A$8.07 a share, which doesn’t include the potential for expansion to a third and fourth train, the Sydney-based analysts wrote in an April 23 report. The shares are worth more than A$10 each if Oil Search and its partners find sufficient gas to expand the project to a fourth train, they wrote.

“It’s a very attractive asset and there aren’t many LNG assets in the world with the kind of economics that PNG LNG has, with the scope for further expansion,” Mark Samter, a Sydney-based analyst at CIMB, said by phone.

One potential acquirer of Oil Search is Perth, Australia-based Woodside, which could use its shares to make a A$10-per-share bid for Oil Search and gain “near-term production and near-term cash flows,” Samter said.

Largest Takeover

That would value the company’s equity at A$13.4 billion, making a takeover the largest purchase of an energy asset in the Asia Pacific region, data compiled by Bloomberg show.

Laura Lunt, a Woodside spokeswoman, declined to comment. The company’s Chief Executive Officer Peter Coleman joined in 2011 after 27 years at Exxon, where he was responsible for projects including PNG LNG.

Woodside, which abandoned a plan last month to develop an LNG project on the Western Australia coast because its estimated $45 billion cost is too expensive, will probably seek acquisitions to add production, said Andrew Williams, a Melbourne-based analyst at RBC Capital Markets.

“Does Woodside need it?” Williams said in a phone interview when asked about potential purchases. “If you look at the production profile out to 2018 -- yeah, the cupboard is bare.”

PNG Entry

Irving, Texas-based Exxon may choose to preempt a bid for its partner in Papua New Guinea, according to CIMB’s Samter. Exxon said in December it expects Papua New Guinea to supply more than 10 million tons of LNG annually by 2025 and that the Asia-Pacific region will account for 29 percent of worldwide gas demand in 2040.

There’s also Papua New Guinea, which owns about 15 percent of Oil Search shares. The country’s government has issued bonds to Abu Dhabi’s International Petroleum Investment Co. that are exchangeable for its Oil Search stake.

“It would require a very significant premium and a price of well over A$10 to have any credibility,” said Cahill, the Quest partner. “The next issue after that would be Exxon’s reaction, and whether Exxon sees fit to respond.”

Rebecca Arnold, a spokeswoman for Exxon in Papua New Guinea, said the company doesn’t comment on speculation.

Another possible buyer is Total, Europe’s third-biggest oil company, said Bernstein’s Beveridge. Total reached a deal with Oil Search in October to explore for gas in Papua New Guinea. CEO Christophe de Margerie has pledged to raise production from new fields and explore more aggressively for reserves to revive output growth.

Total spokesman Charles-Etienne Lebatard declined to comment.

Exxon’s management of the PNG project gives investors a “degree of comfort” in Oil Search, said Tony Regan, Singapore-based consultant at Tri-Zen International Pte.

Oil Search “will shortly be earning quite significant sums from PNG LNG and seem to have a plan to go to the next stage,” he said by phone. “So they’re looking attractive.”

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