Oil Search launches $1.16bn raising as it faces long oil price slump
Oil Search says a $1.16bn capital raising aims to ensure it can withstand ‘a prolonged period of lower oil prices’.
Oil Search will consider selling part of its prized stake in the PNG LNG project to further boost its balance sheet should a $US700m ($1.16bn) equity raising fail to overcome a prolonged oil price rout.
A potential selldown of its 29 per cent holding in the Papua New Guinea gas export project was considered alongside a share sale after Oil Search received interest from buyers in acquiring a stake.
Ultimately it did not proceed given the need to secure funds urgently and the potential a stake would have been sold at a discount given depressed oil market conditions.
However, a selldown would be considered in the future.
“We looked at that in detail and what we considered was that at the current time with the quality of that asset we weren’t going to get a return commensurate with its value,” chief executive Keiran Wulff said, referring to its PNG LNG stake.
“It would have taken a lot longer time to achieve. But the reality is there are some parties who have expressed interest in the asset which would require a longer term review. We’re always open to divesting part of assets for the right price.”
Oil Search launched a $US700m capital raising on Tuesday at $2.10 a share, a 23 per cent discount to its closing share price of $2.73 on Friday. The offer was split between a $760m institutional placement and a $400m entitlement offer with one new share bought for every eight held.
Up to 552m new shares representing 36.2 per cent of its securities will be issued. Its largest shareholder, Abu Dhabi’s Mubadala, will not take part in the raising meaning its stake will be diluted.
Oil Search said the share sale will allow it “additional time” to finalise the P’nyang gas accord needed for a $20bn LNG expansion in PNG along with its Alaskan developments.
However, Bernstein warned there was still not enough money to fund growth with a further $US1.4bn raising required down the track based on a $US50 a barrel oil price.
“Oil Search has great assets but not the ability to fund growth. The retirement of CEO Peter Botten will make shareholders more open to a M&A,” Bernstein analyst Neil Beveridge said. “PNG partners Exxon and Total are possible bidders, although with the company now trading well below the cost of what many LNG projects can be built for, Woodside may be tempted.”
A looming $US300m loan that was due to expire on September 13 was extended until June 2021 while the capital raising will cut gearing to 28 per cent with liquidity of $US1.835bn.
Funds from the equity sale will provide a buffer until December 31, 2021 assuming the average Brent oil price remains above a low-$US20 a barrel level.
Still, Oil Search said there is a risk of noncompliance with the covenant by December 31 if the spot Brent oil price averages below low $US20s a barrel for the rest of this year.
Lenders have indicated they would consider covenant waivers if required.
“Obviously Oil Search runs downside sensitivities but to be fair an oil price that reached the low $US20s — and one that we’re making sure we’re robust against in the low $US20s — was probably beyond the downside cases we were running and I think most companies were running,” Oil Search chief financial officer Stephen Gardiner said on an investor call. “These are incredibly unusual circumstances that were very hard to predict obviously.”
The energy operator has shed two-thirds of its value since January with the collapse in oil prices sparking major cost cutting in a bid to conserve cash after it warned of “unprecedented times” in markets.
It had already announced plans to slash spending this year by 40 per cent and cut 100 jobs between its Sydney and Alaskan offices. Some 800 contractors and staff of its 2000 strong PNG workforce had been shed with some of those workers stood down without pay.
The planned sale of a 15 per cent stake in its Alaskan assets has been suspended although talks continue with several parties.
All work on developing an early production system for its Pikka oil unit in Alaska has also been placed on hold.
Talks continue on the company’s planned PNG expansion — which still requires a P’nyang pact to be agreed with the government — although work on the development will slow.
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