4th UPDATE: Oil Search: LNG Stake Sale Ended, Flags Raising

Oil Search Ltd. (OSH.AU) said Monday time constraints have forced the shock termination of a deal designed to help fund its share of the proposed US$15 billion Exxon Mobil-led (XOM) PNG LNG project in Papua New Guinea, due to be sanctioned in early December.

Oil Search, which will instead source A$895 million from a capital raising that will dilute the value of its shares, had in August agreed to sell a 3.5% stake in the project to Abu Dhabi-based International Petroleum Investment Co., or IPIC, to meet its funding needs.

But it said Monday the deal wouldn't be able to be completed to meet Exxon Mobil's preferred target date, partly because the Australian Securities Exchange said shareholder approval would need to be sought for the IPIC deal to proceed.

"The project has significant momentum and we didn't want to interrupt that," Oil Search Managing Director Peter Botten told reporters, adding that the cost of the company's debt could increase if there's less certainty about project equity.

Termination of the IPIC deal shows how determined the PNG LNG partners are to complete the project on schedule, with up to a dozen proposed Australian LNG terminals competing for customers. Exxon Mobil in particular has a reputation to protect, with many analysts more bullish on PNG LNG due to the U.S. major's track record of delivering projects on time.

Oil Search's share of PNG LNG, which is targeting first gas in late 2013 or early 2014, is expected to be reduced to 28%-31% from the current 34% once the Papua New Guinean government backs into the project as planned.

Exxon Mobil wants to make a final investment decision Dec. 8 and the project's planned capacity has been expanded to produce 6.6 million metric tons of LNG a year, up from a previous 6.3 million tons. The expansion is partly behind an increase in the project's cost estimate to US$15 billion from US$12.5 billion.

Oil Search will offer new shares to institutions at A$5.90 each, representing a 12.6% discount to their last trade of A$6.75. It also intends to launch a share purchase plan.

The termination of the IPIC deal is surprising, given the well-progressed status of the negotiations and IPIC's existing interest in the project's construction. It is also a little embarrassing for Oil Search, which had said the need to conduct an equity raising was highly unlikely.

IG Markets Research Analyst Ben Potter warned that analysts could downgrade their earnings forecasts for the company.

"As we know, markets hate surprises and analysts would certainly have preferred the original equity sell down rather than a dilutive capital raising," Potter said.

IPIC got involved in PNG LNG in November when it agreed to purchase 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, completed March, involved the government issuing exchangeable bonds with a strike price - the price at which they can be converted to Oil Search shares - of A$8.55 each. IPIC's interest in Oil Search prompted the Australian Securities Exchange to request a shareholder meeting for the proposed PNG LNG stake sale to IPIC, as it considered it to be a related party transaction.

In its statement on Monday, Oil Search quoted IPIC's Managing Director Khadem Al Qubaisi as saying IPIC "strongly believes in both Oil Search and the PNG LNG project" and looks forward to being Oil Search's largest shareholder upon exercise of the convertible bonds.

Botten indicated that it's unlikely Oil Search will consider selling equity in PNG LNG to IPIC after the final investment decision in December.

"I don't anticipate that we'd have that need, having taken a difficult dose of medicine today," he told reporters.

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

Along with the Chevron Corp.-operated (CVX) Gorgon LNG project, PNG LNG is considered by analysts as a frontrunner ahead of other rival projects in the region.

PNG LNG had already underpinned its original full capacity of 6.3 million tons a year with four separate offtake agreements - although finalization of those into binding contracts remains a work in progress.

Oil Search said Monday that "there is a high degree of confidence" that the project will find customers for the additional 0.3 million tons a year of LNG before Dec. 8.

JPMorgan estimated in May that Oil Search could get US$500 million for selling a 3% interest in PNG LNG.

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.

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

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