Oil Search to merge with InterOil in $2.2-billion deal

Australian and Papua New Guinea-listed Oil Search Ltd. has made an agreement to acquire InterOil Corp. in a cash and scrip offer valued at $2.2 billion. In a side deal, a memorandum of understanding was signed by Oil Search and French company Total SA for Oil Search to sell down 60% of the interest acquired from InterOil in Papua New Guinea retention lease PRL 15 that contains the Elk-Antelope gas field and 62% of InterOil’s exploration assets to Total, subject to closing the InterOil acquisition.

All three companies are in the Total-operated joint venture, which is proposing to develop the Elk-Antelope resources in the Eastern Highlands of Papua New Guinea in an LNG scheme known as Papua LNG.

The Oil Search-InterOil acquisition has been recommended by both firms’ boards.

The consideration for InterOil shareholders includes 8.05 shares of Oil Search stock plus a contingent value right (CVR) for each InterOil stock share.

The implied transaction value of the share component is $40.25/share of InterOil stock, which is a 27% premium to InterOil’s close on May 19.

In addition, the CVR entitles holders to a contingent cash payment that is linked to the volume of 2C gas resources in the Elk-Antelope fields. Each CVR will deliver about $6.05/share of InterOil stock for each trillion cubic foot above 6.2 tcf gross 2C gas resources and will be paid in cash on completion of the gas certification process.

In this regard, a key to the volume of gas resources will be the Antelope-7 appraisal well scheduled for drilling late this year. The well is expected to provide one of the final pieces in the jigsaw of Elk-Antelope reserves. At this stage, estimates vary between 6-7 tcf, but a success at Antelope-7 could see the figure rise to as much as 10 tcf. The higher figure would also give comfort for a two-train development.

If the merger is completed and Oil Search sells down some of its share to Total, Oil Search will have 29% of the project and Total 48% once the Papua New Guinea government has taken up its equity.

In this part of the deal, Total will pay Oil Search $141.6 million in mid-2017 and $230 million at the time of final investment decision of the Papua LNG project.

Oil Search’s MOU with Total derisks Oil Search’s InterOil acquisition through the sell-down process and establishes an aligned partnership between Total and Oil Search. It also provides the potential to bring in new partners to Papua LNG, including prospective LNG buyers.

There is also the potential for cost minimization, acceleration of the Papua LNG development schedule and optimal resource utilisation through some form of cooperation and integration with the existing ExxonMobil Corp.-led Papua New Guinea LNG project in which Oil Search is also a substantial member.

Once the Oil Search-InterOil merger is implemented, one director of InterOil will be invited to join the Oil Search board.

The transaction is to be carried out via a court-approved plan of arrangement and will require approval from at least 66.66% of votes cast by InterOil shareholders at a special meeting timed for July.

The merger plan comes in the midst of a battle between the InterOil board and former Chief Executive Officer and founder Phil Mulacek who holds a 7.5% stake in the company. Mulacek wants to replace a number of sitting InterOil directors and make sweeping changes to the company.

It remains to be seen whether he will fight the Oil Search deal and try to muster sufficient disaffected shareholders to vote against it.

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