Oil Search Pays $3 Billion For InterOil

The Papua New Guinea (PNG) oil company, Oil Search [ASX:OSH], has turned from prey to predator. Last year, Woodside Petroleum [ASX:WPL] tried to force through an aggressive takeover of Oil Search. But it proved to be in vain, as Oil Search threw out the $11.6 billion dollar proposal. They believed the bid did not reflect Oil Search’s true intrinsic value.

Now Oil Search has been prompted to do some acquiring of their own. This morning, the company revealed that they’d be taking over InterOil [NYSE:IOC]. InterOil is an independent oil and gas company with a primary focus on PNG.

Their assets include one of Asia’s largest undeveloped gas fields. It seems fitting that Oil Search would be interested in the acquisition of InterOil’s assets. Oil Search is the largest oil and gas explorer in PNG, and operates across every PNG oilfield. By cutting out competition, Oil Search has gained a 29% stake in the PNG liquefied natural gas (LNG) project.

It’s one of the largest LNG projects in the world, supplying four major customers in Asia. Pipelines span all over PNG, across some 700 kilometres. Moreover, storage capacity at the Port Moresby facility ensures room for more than 6.9 million tonnes of LNG per year.

Papua New Guinea Oil Search

Source: Oil Search

Other part-owners include Santos Ltd [ASX:STO] and ExxonMobil [NYSE:XOM]. With more than nine trillion cubic feet (tcf) of gas, and 200 million barrels of liquid, the project has an expected 30-plus year life. Just this project alone has transformed Oil Search into a significant LNG exporter.

Importantly, investors should be determining whether the acquisition adds to shareholder value. This is primarily what drives companies to do anything. Shareholders are the owners, with management put in place to yield the highest returns for them.

It’s why company executives always talk about increasing shareholder value.

But how do we identify if this takeover is in the best interests of shareholders?

Will Oil Search shareholders be better off? Almost certainly.

How? If nothing else, they will benefit from now owning a business which can produce more oil — and higher profits as a result. Should oil and gas prices drop in the future, the ability to increase supply will help the company’s bottom line.

The acquisition will also benefit InterOil’s shareholder. How? First, InterOil shareholders will be offered a premium on their current share price. And second, InterOil shareholders will hold an interest in Oil Search’s assets base and dividend stream.

Effectively, this is a win-win scenario.

In a separate agreement, part of InterOil’s key assets will be sold off to French giant Total SA [EPA:FP]. Total will pay Oil Search cash for 60% of InterOil’s assets. This action will effectively reduce the risk of acquiring InterOil.

Chairman of Oil Search, Rick Lee, commented on the agreement, stating:

Oil Search believes that the acquisition of InterOil represents an excellent outcome for InterOil and Oil Search shareholders and enables both companies to benefit from the value created through the commercialisation of the gas resources in PRL 15. We look forward to welcoming InterOil shareholders onto our register and together, continuing to grow in PNG.’

Surprisingly, Oil Search opened down 2.3% this morning. Yet this was followed by a 6.6% spike on open, hitting as high as $7.15 per share in early trade.

Oil Search

Source: Google Finance

Härje Ronngard,

Junior Analyst, Money Morning

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