07-19-2016, 10:46 PM
COLUMN-ExxonMobil's offer for InterOil a model for buying at the bottom:
Russell
By Clyde Russell
LAUNCESTON, Australia, July 19 (Reuters) - ExxonMobil Corp's
bid to buy a junior natural gas explorer in a remote Pacific
country shows that rare corporate ability of planning a deal at
the bottom of the commodity cycle that holds the promise of
long-term returns.
ExxonMobil <XOM.N> has offered at least $2.2 billion for
InterOil Corp <IOC.N> in order to obtain the smaller company's
natural gas assets in Papua New Guinea.[see story]
In doing so, the world's biggest listed oil company has
trumped an offer from Australia's Oil Search <OSH.AX>, which was
backed by French major Total <TOF.PA>.
At first blush the logic for the deal may seem somewhat
lacking, given the sole use of InterOil's gas fields would be to
supply a liquefied natural gas (LNG) plant, and the last thing
needed in the current market is more of the super-chilled fuel.
Asian spot LNG prices <LNG-AS> ended last week at $5.75 per
million British thermal units (mmBtu). While this is higher than
the record low of $4 hit in April, it's still only about a
quarter of the all-time high of $20.50 reached in February 2014.
The outlook for LNG prices is also constrained for the
foreseeable future, as the market will have to absorb a surge in
supply from eight new projects in Australia, five in the United
States and the potential for more from new provinces such as
East Africa.
So why would ExxonMobil bother buying InterOil's stake in
gas fields in Papua New Guinea, especially when the Texas
company already operates an existing LNG plant in the country?
It's that existing plant that holds the key, as the best
option for ExxonMobil to expand its 6.9-million tonne a year
capacity is to acquire sufficient reserves to justify building
another liquefaction train.
InterOil's Elk-Antelope gas field holds at least 6.2
trillion cubic feet of natural gas, and further drilling should
expand this reserve.
It is also high-quality gas and the cost of doing business
in Papua New Guinea is less than in neighbouring Australia.
This means ExxonMobil's bid, if successful, could underwrite
the expansion of its PNG LNG project on a timescale that may see
it deliver its first cargoes just as the surplus of LNG is
expected to disappear in the mid-2020s.
InterOil's board has switched to backing ExxonMobil's offer
over the rival bid from Oil Search, although the Australian
company has the chance to trump the counter offer.
It's unlikely that Oil Search will try to do so, because
even losing out to ExxonMobil could see it emerge as a winner
anyway.
This is because Oil Search is already a 29 percent
stakeholder in the ExxonMobil-operated PNG LNG project, a share
not too far behind the U.S. giant's 33.2 percent.
Any deal that boosts the prospects for PNG LNG will also be
good for Oil Search.
In addition, the Australian company holds a 22.8 percent
stake in the Elk-Antelope gas field, the target of ExxonMobil's
InterOil bid.
If ExxonMobil succeeds in acquiring InterOil, Oil Search
effectively becomes the junior partner in both the existing LNG
plant and any potential expansion using the Elk-Antelope
resources.
TOTAL WILD CARD
The big question for both ExxonMobil and Oil Search is what
will Total do.
The French company owns a 40.1 percent stake in Elk-Antelope
and is the operator, with InterOil the next biggest holder at
36.5 percent.
Total has outlined plans to build its own LNG project in
Papua New Guinea, something that may prove impossible if
ExxonMobil and Oil Search believe their interests lie with
expanding the existing facility.
It's worth bearing in mind that even with Papua New Guinea's
superior cost structure, a new LNG plant would struggle to be
viable in the current environment of low prices.
It's possible that all parties could end up working
together, but it may be more practical to find a way to buy out
Total's position in Elk-Antelope.
The attitude of the PNG government will also be important,
as it will have to be convinced that a brownfield expansion of
the existing LNG plant is a better long-term bet than trying to
build a second, greenfield operation.
As can be seen, there are many loose ends still to tie up,
but ExxonMobil appears to be making a strong bid for quality
assets with its eyes firmly on the long term.
If it all works out, this could be a great example of a
resource company doing what commentators always say they should
be doing, namely buying good assets at the bottom of the market
and seeking ways to exploit them in a cost-effective manner.
Resource companies have correctly copped criticism when they
do expensive acquisitions at the top of the commodity cycle, so
they deserve kudos when they buy when the market looks bleak.
(Editing by Richard Pullin)
((clyde.russell@thomsonreuters.com)(+61 437 622 448)(Reuters
Messaging: clyde.russell.thomsonreuters.com@reuters.net))
"And maybe someday we will find , that it wasn't really wasted time"
