Oil Search Raising A$895 Million After PNG Sale Fails

By James Paton and Ben Sharples

Oct. 19 (Bloomberg) -- Oil Search Ltd. plans to raise A$895 million ($822 million) in a share sale after terminating plans to sell a stake in a Papua New Guinea liquefied natural gas venture to Abu Dhabi’s energy investment arm.

Oil Search is selling shares at A$5.90 each, 12.6 percent below the last close, the Port Moresby-based company said today. Selling a 3.5 percent project stake to International Petroleum Investment Corp. was scrapped as there isn’t time to complete it before a Dec. 8 target for a final investment decision set by venture operator Exxon Mobil Corp., Oil Search said.

Offering shares to institutions is “not the preferred option,” Oil Search Managing Director Peter Botten said on a conference call. “The reality is we’ve always highlighted it as an option, but toward the bottom of the list.” The sale equates to 13 percent of Oil Search’s issued stock.

Estimated first-phase costs for the project, which Exxon has said will double the size of Papua New Guinea’s economy, have risen to $15 billion from a previous projection of $12.5 billion, Oil Search said. Its estimated share of future costs is $5 billion, of which $1.3 billion will be funded by equity, Botten said. In an Oct. 6 presentation, Oil Search said it expected to complete terms of the sale to IPIC shortly.

Negative ‘Surprise’

“It’s very negative,” said Anthony Anderson, a trader at MF Global Ltd. in Sydney. “The market had only been reassured as little as a week or so ago that everything was going ahead with the previous deal. Fund managers very much hate that sort of thing, when you’re kept in the dark and surprises are thrust upon them.”

The share sale, which allows Oil Search to meet its share of the project costs and to fund expansion, provides certainty while the company negotiates financing with banks and “allows us to maintain full interest” in the project, Botten said.

Financing talks are on schedule, with a number of banks moving forward with due diligence, Oil Search said today.

The processing plant’s capacity has been expanded to 6.6 million metric tons a year, up from 6.3 million tons, because of greater fuel efficiency, the oil and gas producer said.

There is a “high degree of confidence” that sales accords for the additional 300,000 tons of LNG from the expanded plant will be signed before a final investment decision, the company said.

Santos, Nippon Oil

Botten said in an interview last month that committed spending on the venture had reached $1 billion. First gas sales are scheduled for late 2013 or 2014.

Exxon owns 41.5 percent of the venture, Oil Search 34 percent, Adelaide-based Santos Ltd. 17.7 percent and Tokyo-based Nippon Oil Corp. 5.4 percent.

Botten said adding LNG producing units, or trains, at the venture “is a high priority,” and proceeds from the share sale will be used partly to fund those efforts. There is a “real opportunity to build further trains onto this initial infrastructure,” he said. “Our vision is for a series of trains being built,” subject to proving its gas resources, and “we’re very confident we’ll see that.”

Oil Search, which has gained 45 percent in Sydney this year, compared with the 30 percent advance in the benchmark S&P/ASX 200 Index, last traded at A$6.75, valuing the company at about A$7.7 billion. The shares remain in a trading halt.

The Australian stock exchange advised Oil Search that shareholder approval would be needed for IPIC’s purchase of a PNG LNG stake. Given the uncertainty over whether the process could be completed before the Dec. 8 final investment decision target date, the two parties had agreed to call off the discussions, Oil Search said.

While IPIC is unlikely to participate in the share sale, it will become Oil Search’s largest shareholder on exercising a A$1.68 billion exchangeable bond bought last year.

“IPIC still strongly believes in both Oil Search and the PNG LNG project,” Managing Director Khadem Al Qubaisi said in Oil Search’s statement. “IPIC views the PNG LNG project as extremely attractive and robust.”

To contact the reporter on this story: James Paton in Sydney jpaton4@bloomberg.net: Ben Sharples in Melbourne at bsharples@bloomberg.net