2nd UPDATE: Oil Search: LNG Stake Sale Ended, Flags Raising

Oil Search Ltd. (OSH.AU) on Monday announced the shock termination of a deal that would have helped it fund the development of a multibillion gas export project in Papua New Guinea and said it would launch an equity raising instead.

Three separate traders told Dow Jones Newswires that Oil Search would attempt to raise A$900 million through a placement of shares to institutional investors.

Oil Search said in August it was in late-stage talks to sell a 3.5% stake in the Exxon Mobil-led (XOM) PNG LNG liquefied natural gas project to Abu Dhabi-based International Petroleum Investment Co., or IPIC.

The deal was meant to help Oil Search fund its remaining share of the massive development. Its termination comes as a surprise, given the well-progressed status of the negotiations, analysts' praise of PNG LNG as a quality project, and IPIC's existing interest in the project's construction.

In March, IPIC completed a purchase of the Papua New Guinean government's 17.6% stake in Oil Search as the government sought capital to fund its share of the project's development.

That deal, flagged last November, involved the government issuing exchangeable bonds for its holding in Oil Search. The exchangeable bonds have a strike price - the price at which they can be converted to Oil Search shares - of A$8.55 each.

Oil Search last traded at A$6.75. Its shares are currently in a trading halt.

Although the deal termination with IPIC is not an ideal situation for Oil Search or the PNG LNG project partners, which also include Santos Ltd. (STO.AU), it is unlikely to cause much disruption, with Oil Search likely to pull off the capital raising, albeit at a dilutionary discount.

The PNG LNG partners are aiming to make a final investment decision on the project by year-end.

Most of the funding for its construction is expected to be provided by export credit agencies. Oil Search said in August negotiations with commercial banks for additional funding commenced that month and it could possibly conduct a bond issue.

Oil Search did not provide an explanation for why the deal with IPIC has been terminated, although it is expected to make another announcement to the market later Monday.

Along with the Chevron Corp.-operated (CVX) Gorgon LNG project, PNG LNG is considered by analysts as a frontrunner ahead of about a dozen planned LNG projects in Australia and Papua New Guinea. Unlike some of the other proposed projects, PNG LNG has already underpinned its full 6.3 million tons a year capacity with four separate offtake agreements - although finalization of the agreements into binding contracts remains a work in progress.

JPMorgan estimated in May that Oil Search could get US$500 million for selling a 3% interest in PNG LNG, of which Oil Search currently owns about 34%.

Australian integrated energy company AGL Energy Ltd. (AGK.AU) agreed to sell its PNG oil and gas assets, which included a 3.6% stake in the PNG LNG project, last October for US$800 million.

Credit Suisse said in August it would expect Oil Search to get a better price compared with AGL Energy, given the significant de-risking of the PNG LNG project since late last year, indicating Oil Search could launch a capital raising close to A$1 billion.

-By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com

Oil Search (ASX:OSH)
Historical Stock Chart
From Jun 2024 to Jul 2024