Sheikh’s Debt Deal for Exxon LNG Stake May Prompt Offers

A convertible debt deal struck during the 2008 financial crisis led by billionaire Sheikh Mansour bin Zayed Al Nahyan of Abu Dhabi is set to trigger a contest for a slice of a $19 billion natural gas project.

The export terminal being built by Exxon Mobil Corp. is in Papua New Guinea, one of the world’s poorest nations, which now wants to buy back the debt before it becomes equity for Abu Dhabi. The project is forecast to double the local economy with global LNG demand estimated to rise twofold by 2025.

Sheikh Mansour, a member of Abu Dhabi’s ruling family and owner of Manchester City soccer club, is due to oversee a swap of that debt for a 14.7 percent stake in Oil Search Ltd., owner of almost a third of the project. The March conversion date is sparking speculation that producers including Exxon, the world’s biggest energy company, may also seek the holding.

“There could be competition for this stake,” said Johan Hedstrom, senior oil and gas analyst at Canaccord Genuity Group Inc. in Sydney. “There are a number of big companies genuinely interested in getting into Papua New Guinea.”

The coming swap has spurred talks between Abu Dhabi, home to the first gold-bar vending machine, and Papua New Guinea, the Pacific nation near Australia whose gross domestic product is less than 5 percent of Exxon’s $410 billion market value.

Exxon and Total SA are among potential acquirers for Oil Search, Sanford C. Bernstein & Co. said earlier this year. Total declined in an e-mail to comment. Alan Jeffers, an Exxon spokesman in Irving, Texas, said in an e-mail it was the company’s policy not to comment on potential business decisions.

Sovereign Fund

The sheikh is chairman of Abu Dhabi-owned International Petroleum Investment Co., which completed the purchase of the A$1.68 billion ($1.6 billion) of exchangeable bonds in 2009. The emirate has the third-largest sovereign fund with $627 billion in assets, the Sovereign Wealth Fund Institute said.

The PNG government already has a 17 percent interest in the project. It wants to hold on to the stock in the company, and IPIC also recognizes Oil Search’s potential, Peter Botten, managing director of the Port Moresby-based company, said in a phone interview. “There’s a commercial dynamic and also a government-to-government dynamic, and on that basis it has a few more dimensions than a straight commercial deal.”

Voice mail messages left at IPIC’s offices in Abu Dhabi weren’t returned. Calls to government offices in Papua New Guinea weren’t answered.

Barclays Swap

The sheikh is experienced in converting debt and equity. He used convertible stock in 2008 to become at the time the biggest holder in Barclays Plc, and swapped almost $500 million of loans for equity in Manchester City in 2010, two years before the soccer club won its first premiership in 44 years.

Citigroup Inc., UBS AG and Barclays are among banks seeking to provide more than A$1.5 billion in financing to help Papua New Guinea maintain its holding in Oil Search, people with knowledge of the matter said last month. The LNG development is forecast to generate more than $30 billion in cash for the nation over three decades, according to a 2008 report by consultants Acil Allen Consulting.

Total, Europe’s third-biggest oil company, reached a deal last year with Oil Search, which owns a 29 percent stake in the Exxon project, to explore for gas in PNG, while Royal Dutch Shell Plc said in 2011 it would look at opportunities in the country. InterOil Corp. started talks this year with Exxon to jointly develop gas fields in the Pacific nation.

“It would potentially put 15 percent of the stock in play” if IPIC gets the shares, said Andrew Williams, Melbourne-based oil and gas analyst for RBC Capital Markets. “It’s what makes the scenario interesting for Oil Search.”

Global Demand

The Asia-Pacific region will account for 29 percent of total worldwide gas demand in 2040, according to Exxon. PNG’s gross domestic product is forecast to almost double to $24 billion from 2011 to 2015, according to the International Monetary Fund. It will gain 21 percent in 2015, the second-fastest growth in the world, according to the data.

“IPIC I’d think would be very interested in maintaining a position in PNG one way or another as an investor because it is looking increasingly attractive as a gas play,” said Tony Regan, a Singapore-based consultant at Tri-Zen International Inc. Oil Search appeals to investors because of the potential to expand the LNG project and develop a second one, he said.

Talks between Papua New Guinea and Abu Dhabi indicate that IPIC is at least interested in a deal, said Mark Samter, a Sydney-based oil and gas analyst at Credit Suisse Group AG. Papua New Guinea may offer Abu Dhabi LNG from its share of supplies from future production units as part of a deal to retain the Oil Search holding, according to the bank.


Still, IPIC is unlikely to sell the stake, according to a Bank of America Merrill Lynch report last month.

IPIC is “typically a very long-term investor, buy and hold, and likes large minority stakes,” Robin Mills, head of consulting at Manaar Energy Consulting & Project Management in Dubai, said in a phone interview.

IPIC’s ownership of the stake could see a speculative premium develop in Oil Search’s share price with a potential acquirer targeting the holding as a cornerstone ahead of a bid, JPMorgan Chase & Co. said in a Sept. 30 report.

“As we progress to deliver PNG LNG and then various high-returning expansion opportunities there’s no doubt there’s going to be a group of people that will be interested in Oil Search and I’m sure that will continue,” Botten said.