Two major takeover offers involving leading companies operating in Papua New Guinea’s oil and gas industry have emerged in recent months. Business Advantage PNG spoke to oil and gas analysts about what this mergers and acquisitions activity means for the sector.

The success of the PNG LNG project has put PNG in the thick of mergers and acquisitions activity in the oil and gas industry.

Papua New Guinea’s involvement in two of the year’s major oil and gas takeover proposals reflects how the PNG LNG project has lifted the country onto the world stage, according to resources analysts.

And they believe the potential is there for more deals involving oil and gas companies operating in PNG.

Two stakeholders in the PNG LNG project—Oil Search Ltd and Santos Ltd—have rejected bids in recent months. Oil Search denied a Woodside Petroleum Ltd offer that valued the company at about AUD$11.6 billion, believing it was ‘opportunistic’ in current market conditions. Woodside has since kept its distance, but has not ruled out approaching Oil Search again with another attempt.

Santos knocked back an offer it received from Scepter Partners, which is backed by sovereign wealth fund and the royal families’ of Brunei and the United Arab Emirates.

‘I suspect the littler fish are being nibbled at—there’s certainly some consolidation that could go on in the Highlands, without doubt.’

In survival mode, Santos this month hired a new CEO, while announcing it would sell off assets, issue new shares and form a partnership with a Chinese investor to raise funds in an effort to improve its balance sheet.

Future deals?

Fat Prophets’ David Lennox

Fat Prophets analyst David Lennox would not be surprised to see more deals involving PNG, but now sees smaller Australian-listed companies operating in the country as likely targets.

‘I suspect the littler fish are being nibbled at—there’s certainly some consolidation that could go on in the Highlands, without doubt,’ Lennox said.

‘You can’t rule out further M&A [mergers and acquisitions] because most of the majors now have what you would term as relatively good balance sheets. It has taken a while for companies to adjust to the oil price, and some are still adjusting, but we’ve now seen most of the strain come out of their balance sheets.’

Patersons Securities analyst Jason Chesters said the climate created in Australia since the commodity downturn had left Oil Search and Santos as prime targets for companies with stronger balance sheets.

‘The decline in the commodity price environment in oil and gas has opened up the landscape for companies with stronger balance sheets to take opportunity where they see it,’ he said.

PNG leads the way

Lennox said PNG sector had ‘led the way’ during this period of M&A activity on the back of the PNG LNG project’s success.

Patersons Securities analyst Jason Chesters.

‘Woodside is looking for growth but (the offer) certainly reflects just how well the project has progressed,’ Lennox told Business Advantage PNG.

‘The project cost a lot of money … but, in the early stage of its life, has moved from exploration to construction and into production very well—it happened so seamlessly.’

Chesters agreed, saying the sector in PNG had ‘come to the fore’ with the latest wave of proposed deals.

‘Now that a significant portion of the (PNG LNG) project is in play, both from Oil Search, as well as Santos’ stake, it creates a dynamic climate for the PNG industry,’ Chesters said.

‘Then, we have the (Elk-Antelope) project with Total, InterOil and Oil Search—that is also a fairly significant project, ultimately requiring a large capex [capital expenditure] when it does occur. Both of those projects have catapulted PNG into a prime position in the LNG space.’

International factors

Chesters added that the Australian M&A environment had been enhanced by several factors in addition to the low oil price, increasing the vulnerability of a company like Santos.

‘In the Australian landscape, there are a couple of other dynamics at play.

‘Obviously, the larger players have dominated and the LNG industry is also changing the landscape of the domestic gas industry, with the amount of gas that is going to be required to feed the new plants in Queensland,’ Chesters said.

He noted that Santos’ balance sheet, for example, had been stretched by its investments in the GLNG project in Queensland at a time of lower commodity prices.

‘It limits the potential then for those companies to look at M&A opportunities because they don’t have the capacity—their main issue is actually asset sales,’ Chesters said.