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Thu 6 Feb 2014 04:34 PM

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Papua New Guinea mulls options to pay Abu Dhabi bond

PNG government said to be against giving up oil firm stake to pay $1.48bn bond

Papua New Guinea mulls options to pay Abu Dhabi bond
(Photo for illustrative purposes only)

Papua New Guinea has decided to raise A$1.68 billion ($1.48 billion) to pay off a bond it issued to Abu Dhabi in 2009 instead of giving up a strategic stake in oil and gas producer Oil Search, a source familiar with the decision told Reuters on Thursday.

The move could be the first step towards bringing Oil Search into play, with potential suitors now needing to court only the PNG government to gain a foothold in the A$11-billion company.

Global oil giants Royal Dutch Shell and Total SA, and Australia's Woodside Petroleum are said to be among companies eyeing Oil Search.

Oil Search is considered a juicy target as it owns a 29 percent stake in the $19 billion PNG liquefied natural gas (LNG) project, which is on track to start shipping the supercooled gas in the second half of 2014.

The five-year bond, issued to Abu Dhabi's International Petroleum Investment Co (IPIC) at the height of the global financial crisis, was exchangeable for PNG's stake in Oil Search in March 2014 at a strike price of A$8.55 a share.

Oil Search shares last traded at A$8.09.

The PNG government has appointed UBS to help the state raise A$1.68 billion to refinance the IPIC bond, the source familiar with the decision said.

PNG needed the A$1.68 billion in 2009 to foot its share of the development costs on the PNG LNG project, which is operated by ExxonMobil Corp.

The government already owns a 16.8 percent direct stake in the $19 billion PNG LNG project, and may be a willing seller of its interest in Oil Search at the right price.

Anyone looking to buy the government's stake in Oil Search would have to pay a sizeable premium, possibly valuing the company at about A$14 billion, as the government has a view the share price could reach A$20 by 2020, analysts said.

That view is driven by the fact that by then the PNG LNG project will be producing and may have expanded its output capacity and Oil Search could also be producing oil in Iraq's Kurdistan region.

"If there's going to be a corporate play on Oil Search, there's a very narrow window to do it," Andrew Williams, an analyst at RBC Capital Markets, said in January. "There's a lot of potential drivers in there that could send the stock significantly higher."

Analysts are forecasting Oil Search's annual profit to more than quadruple to A$791 million over the next two years alone, according to Thomson Reuters.

France's Total is seen as a potential suitor or partner with Oil Search after buying a stake in December in PNG firm InterOil's license holding the Elk and Antelope gas fields in a deal worth up to $3.6 billion.

Those fields could form the foundation for a new LNG project in the country or feed gas into a potential expansion of ExxonMobil's PNG LNG project.

Shell has been looking to get into PNG, UBS analyst Nik Burns said in January, and Woodside Petroleum could be interested in Oil Search as it needs to fill a gap in its growth outlook.

"The government would take a very long, hard look at whoever wanted to acquire the company, whether it controlled the stake directly or not," Burns said.

There was heavy competition for the mandate to work with the PNG government, the source said.

JP Morgan, Barclays and BNP Paribas had previously been reported to be in the running.

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