While it now has until Thursday to match a higher offer for InterOil Corp lodged by global oil major ExxonMobil, analysts and fund managers expect Oil Search to stay its hand, now that co-operation between two gas export projects in PNG is regarded as a certainty.
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ExxonMobil and Oil Search are partners in an existing gas export project in Papua New Guinea, the $US19 billion PNG LNG.
Oil Search and InterOil, together with French oil major Total, are seeking to develop a second gas export project, known as Papua LNG. To ensure the new project seeks to work co-operatively with the existing project, which would reduce development and operating costs and improve shareholder returns, Oil Search recently launched a $US2.2 billion bid to buy out InterOil Corp.
However ExxonMobil has come over the top, offering to pay more for InterOil but structuring its offer similarly to the Oil Search offer, by allowing investors to swap their InterOil shares for stocks in the oil major, while giving InterOil Investors access to any upside in the oil and gas reserves of the Elk-Antelope fields via a so-called "contingent resource payment".
ExxonMobil is offering its shares valued at $US45 each, which is a discount to the InterOil share price of $US47.61 but at a slight premium to the Oil search offer, which is equal to $US44.19 as of Monday's exchange rates.
Oil Search has until Thursday to match the ExxonMobil offer, and maintain the endorsement of the InterOil board, although it could revise its offer at any time.
The ExxonMobil bid underscores the importance of ensuring the two gas export projects work together to reduce costs, given the global glut in the export gas market. And especially since last week Shell, the half-owner of the giant Kitimat export gas project being planned in Canada, refused for the second time in a matter of months to give it the greenlight, due to the high cost of developing a new stand-alone project amid the gas glut.
Equally, by seeking to acquire InterOil, the move by ExxonMobil raises the question over the future independence of Oil Search, making it attractive to either of ExxonMobil or Total, given the company's equity in PNG's two gas projects.
Ben Wilson, an analyst with RBC Capital Markets, estimated the ExxonMobil bid to be worth slightly more than the Oil Search offer, but with added advantage for InterOil shareholders of being offered scrip in another US-listed entity.
"We had considered the Oil Search bid to have been relatively fully priced and hence we see a low prospect of Oil Search reverting with a higher bid within the next three days," Mr Wilson told clients. "Additionally, Oil Search is set to receive a $US60m break fee and the willingness of Exxon to pay up to enter the Elk-Antelope licences signals, in our view, an intent to drive collaboration between PNG LNG and Papua LNG.
"The latter was a prime motivation for the original bid from Oil Search."
