Santos’ PNG stake to thwart rival bid: analysts

Santos may sell down part of its Papua New Guinea LNG stake to a rival to ensure the companies don’t crash its $21bn merger with Oil Search

Santos could sell a stake in its Papua New Guinea liquefied natural gas project to ExxonMobil or Total as a defence mechanism to ensure neither company crashes its $21bn Oil Search merger with a rival bid, analysts said.

The merger deal, already recommended by Oil Search, would hand the combined company 42.5 per cent of PNG LNG, which would give it greater clout than operator Exxon at 33.2 per cent.

Selling a 10 per cent share would align it with joint venture partners and could be a powerful defence tactic amid speculation Exxon or France’s Total might lob a counter bid for Oil Search to boost their own PNG firepower.

“Offering 10 per cent equity in PNG LNG can be a strong defensive strategy mitigating the risk of an interloper coming forward in our view,” UBS analyst Tom Allen said.

Santos’ share of earnings from PNG would double to 40 per cent from 20 per cent under the merger, which also might be seen as too high.

“We believe the greater concentration of earnings in PNG could attract ‘country risk’ scrutiny from ratings agencies,” Mr Allen said.

Oil Search’s $US3bn Alaskan oil project also is seen as ripe for divestment, although it’s unclear whether a single buyer would want to purchase the entire 51 per cent stake.

“While we are supportive of Oil Search’s Alaskan oil project, we expect MergeCo will focus its integration efforts in Asia and will offer operatorship to potential bidders in the current Alaskan oil selldown process and/or consider divesting the asset,” Mr Allen said.

Both PNG and Alaska sales could help power other investment options in Santos’ portfolio along with a beefed-up balance sheet, Wood Mackenzie said.

“A stronger balance sheet will then provide a solid platform from which to invest in new development projects in Australia and PNG,” WoodMac research director Andrew Harwood said.

“Capital reallocation within a larger portfolio, or strategic divestments would be likely to smooth out future outflows.

“The merged company will be able to proceed with existing farm-down processes at Dorado and Alaska from a position of strength.”

The PNG LNG project is considered one of the world’s top performing gas export facilities and is being used as a foundation to eventually double LNG output from the Pacific nation, handing an enlarged Santos greater exposure to the planned expansion later this decade.

Although PNG LNG has been producing near record levels, Exxon said on Tuesday the plant had lost production because of a power failure.

“We can confirm that there was a power outage at Kutubu Central Processing Facility which has resulted in a need to curtail production at Hides Gas Conditioning Plant and the LNG Plant until condensate receipt can be restored,” Exxon said in a statement.

“We understand that the power outage has been restored as of 26 July and are working to resume production over the coming days.”

Oil Search rejected the original all-share offer, with its new interim boss Peter Fredricson saying it needed extra carats added to the deal’s diamond to get a deal over the line.

However, several of Oil Search’s biggest shareholders urged it to engage with its suitor, with the company failing to track a revival in oil prices, uncertainty over the near-term prospects of its Alaskan oil project and leadership turmoil amid the sudden exit of former boss Keiran Wulff over behaviour issues.

Santos fell 1.1 per cent to $6.42 and Oil Search declined 1.3 per cent to $3.94.