Oil Search boss says InterOil takeover will make company 'very competitive'


May 23, 2016 14:09:08

Plunging oil prices have made sitting ducks of many energy producers, dividing the field into the hunters and the hunted.

Oil Search made the switch to hunter after successfully fending off an $11.6 billion approach by Woodside Petroleum late last year, and it is now pouncing on PNG rival InterOil with a $3 billion share and cash offer and a big premium – 27 per cent above InterOil’s last trading price in New York.

InterOil’s assets include a 36.5 per cent interest in Papua New Guinea’s largest gas field, Elke-Antelope, majority owned by France’s Total.

For the takeover to proceed, 66 per cent of InterOil shareholders need to back it.

On The Business, Oil Search’s managing director Peter Botton, the man driving the deal, said the takeover could deliver significant value despite challenging market conditions.

Deal will make Oil Search ‘very, very competitive’

ALICIA BARRY: You’re throwing a lot of money at this deal. How do you justify it with oil prices where they are?

PETER BOTTEN: Well I suppose certainly this low commodity period – low commodity price cycle – is a time when you have to be extremely careful about where you do and how you spend your money.

And I suppose what we’re doing with the acquisitions that we announced today and the sell down to Total is basically looking at ways to optimise our future LNG business in Papua New Guinea primarily.

The synergies between InterOil and Oil Search are very substantial, and with those synergies, together with the influence that a merger brings, delivers us a real opportunity to drive synergy and co-operation between PNG LNG, which we’re a substantial player already and obviously it’s on production.

The development, Papua LNG, and cooperation between those two projects can deliver substantial further value and be very, very competitive in what is a challenging LNG market over the next three to five years.

That’s what we deliver through this deal, enhanced by the fact that the deal’s underwritten by Total and who has again committed to cooperate and a platform for cooperation between the two projects.

Supply-demand cycle will change for LNG ‘sooner or later’

ALICIA BARRY: Well it’s interesting that you mention challenging market conditions because you’re pushing on with new projects while other LNG producers from Canada to Australia are either shelving theirs or delaying theirs.

PETER BOTTEN: Yeah and that’s true. And, look, our projects have not reached sanction beyond PNG LNG base projects of course. But sooner or later, the supply-demand cycle will change for LNG.

The demand side is attenuated a little bit by world economic factors, but at the end of the day, very few LNG projects are going to be sanctioned over the next five or so years.

And we believe that Papua LNG, an expansion of PNG LNG, can be hugely competitive to be one of the few or two of the few that actually can get up in this environment.

You also have to remember it’s a very cheap time to be building things. Capital inflation for construction is low.

So if you’ve got a very good resource, a stable fiscal regime, you can be very competitive and that’s what PNG LNG has proven, but also what we think we can extrapolate into for Papua LNG.

Oil prices have reached ‘the bottom’

ALICIA BARRY: Well back to commodity prices and specifically we’ve seen oil prices go to the depths. Do you think they’ve bottomed?

PETER BOTTEN: Look, I actually think the bottom has been reached. I think the pain across the world oil business in terms of production has had an impact in curtailing some of the short-term oil production out of various places.

I think the drilling operations and development operations in Saudi are slowing down.

I do actually think that there will be a slow, mild recovery in oil price and I think that’ll be a long time ahead, I might say, of where I think the recovery will happen in LNG pricing.

But at the end of the day, we’re not particularly optimistic about oil price, but when I look back, three months ago, it was $US30 a barrel; it’s now $US50 a barrel – almost double in price is actually pretty good.

ALICIA BARRY: So has a bit of a shakeout in the industry given players like you the chance to swoop in on others?

PETER BOTTEN: Well, look, all acquisitions should be done in our view in a very measured way.

It has to be done on the appropriate time and at the appropriate long-term forecast for oil and gas.

These opportunities in Papua New Guinea don’t come along very often and I think we’ve paid a very fair price for InterOil shareholders and a fair price for Oil Search as well.

Deal has been on Oil Search’s mind for over six months

ALICIA BARRY: You told Ticky Fullerton on this program back in February that you would look for opportunities that make sense timing and price-wise in PNG.

Has this deal been on your mind for some time?

PETER BOTTEN: Look, I think it’s certainly been around in our minds strategically for probably six-plus months.

It’s all about timing, it’s all about process and pricing.

And I suppose we’ve got to a comfort level in discussions with InterOil that this is a good time to do it.

We can significantly influence the next phase of LNG growth in PNG and be a significant player in that rather than being to a degree a passenger with the big boys.

ALICIA BARRY: InterOil’s board has had a colourful couple of years to say the least with the board battling with its former founder.

PETER BOTTEN: Yes, it has. I mean, clearly I’m mindful of the press and the various sites that have been out there talking about this.

ALICIA BARRY: Did those problems make it an easy target?

PETER BOTTEN: Look, I think they were irrelevant to our position. Our position was very much driven by what value we saw in it for Oil Search and what strategic importance and what influence we can play in the next phase of growth and position ourselves for that.

Opportunity in oil and gas base is ‘big’, Botton staying on

ALICIA BARRY: Well you’ve been at the helm for 22 years at Oil Search and in a media interview about two years ago you said you had about two years left. Will this be the last deal that you hang your hat on at Oil Search?

PETER BOTTEN: I hope not. I think there’s a bit of life left in the old dog yet, I think. I think the reality of life is I quite rightly and justifiably looked at what I was doing and where I was going when PNG LNG was commissioned.

Frankly, I think the opportunity set in the oil and gas base right now is as big, if not bigger than I’ve seen in almost 40 years of being in the business, and frankly, bringing this deal together and pushing for a cooperation is a really stimulating and challenging thing which I think I can add value to.

So I don’t think I’m quite for the door yet.







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