Gas Jewel on Pacific Island Coveted in Australian Takeover Spree

  • More than $24 billion bid in Australian oil, gas deals in 2015
  • Scepter's $5.15 billion offer for Santos rejected Thursday

The record $24 billion offered for Australian oil and gas companies this year is less about assets in that country and more focused on its smaller neighbor -- Papua New Guinea and Exxon Mobil Corp.’s liquefied natural gas project on the Pacific nation.

Both Santos Ltd., which rejected Scepter Partners’ A$7.14 billion ($5.15 billion) bid on Thursday, and Oil Search Ltd., which knocked back an offer from Woodside Petroleum Ltd. valued at $8 billion last month, have stakes in the Exxon project that’s seen by Sanford C. Bernstein & Co. as one of the best assets to own amid a slump in energy prices.

The $19 billion project started production last year and is a bright spot in a battered energy sector because of its low cost and expansion opportunities. For Scepter, an investment fund backed by royalty in the Middle East and Asia, a higher bid will be needed to acquire the company and its stake in the asset, according to Morgans Financial Ltd.

“It’s the crown jewel,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said by phone. “It offers tremendous resource potential, low development costs and lots of room for expansion. It’s one of the few projects that we see as competitive in this new lower oil price environment, making it appealing to a lot of companies.”

Plants in Papua New Guinea can break even with prices of $6 to $8 per million British thermal units, compared with about $10 in the U.S., according to Macquarie Group Ltd. Asian LNG has averaged $7.52 per million British thermal units this year, compared with $13.93 in 2014, amid a surge in supply.

The offers have already made it a record year for proposed oil and gas deals in Australia, with at least 28 takeover proposals this year worth $24 billion including debt, according to data compiled by Bloomberg. That compares with deals worth a total of $15 billion in the five years before.

‘Slim Premium’

The Santos portfolio also includes the $18.5 billion Gladstone LNG project in Australia and a stake in the ConocoPhillips operated gas export venture in the country’s north. While investors wait to see the next move from Scepter, Woodside Chief Executive Officer Peter Coleman has said his company’s offer for Oil Search is “very competitive” and “fully priced.”

“There was such a slim premium to begin with for Oil Search,” Adrian Prendergast, an analyst at Morgans Financial in Melbourne, said by phone. “Given its broader exposure to LNG growth, the premium will have to be beefed up significantly. For Santos, our valuation is A$8.30, so that’s probably a pretty good indicator.”

The Woodside offer of one of its shares for four Oil Search shares was worth A$7.74 a share as of the close on Thursday, a premium of 4 percent to Oil Search’s close. Scepter’s A$6.88 a share bid for Santos was worth 8.9 percent more than its close of A$6.32.

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