Oil and gas producer Oil Search Ltd unveiled a A$1.4 billion merger offer on Monday for Papua New Guinea's Orogen Minerals Ltd as it seeks to raise its stake in the region's major oil and gas projects.
The merger will give Australia's Oil Search a 37-percent majority stake in the US$3.5 billion PNG to Queensland gas project led by Exxon Mobil Corp (NYSE:XOM - news) and access to significant oil and gas assets in PNG including the Moran oil fields.
It will also create Australia's third-largest energy company with a market capitalisation of A$1.4 billion. The new group, to be called Oil Search, will be the largest listed company in PNG.
``This merged company will have enough muscle to have a real influence on both building up production from our existing oil producing wells and have a more aggressive exploration programme,'' Oil Search chairman Trevor Kennedy told reporters.
Oil Search said it would offer 1.2 of its shares and 45 cents cash for each Orogen share, valuing Orogen at A$1.97 a share or A$632 million.
Orogen shares surged 23 percent in early trade to a high of A$2.00 before closing at A$1.90, 28 cents stronger, in an overall market up 0.39 percent.
Oil Search shares closed up three cents at A$1.24 despite initial gains which saw the Australian group hit a high of A$1.34.
Analysts said Orogen's low debt and strong cash position gave Oil Search much-needed access to funds for further expansion.
``The deal is EPS (earnings per share) positive and certainly gives them a good production boost. The obvious physical attraction for Oil Search was the cash,'' Auzeq Securities oil and gas analyst Andrew Williams said.
Analysts also said it would make the group more attractive to predators willing to tackle the risky PNG market. Oil Search executives refused to comment on speculation Santos Ltd (Australia:STO.AX - news) was interested in the group.
Oil Search's initial priority will be the PNG-Queensland pipeline project, with long-awaited agreements with gas suppliers expected to be finalised shortly, as well as plans for PNG equity in the project.
``We believe an imminent announcement on gas agreement fiscal issues is quite possible with the PNG government which will put to bed a lot of the remaining issues surrounding the development,'' Oil Search managing director Peter Botten said.
The merger potentially streamlines the PNG to Queensland gas pipeline joint venture, with Exxon Mobil currently holding about 38 percent and the two merged companies 37 percent.
``Both groups have been fully supportive of the strategy Exxon Mobil has been implementing to progress the project,'' an Exxon Mobil spokeswoman told Reuters.
Botten said the group would focus on oil and gas and make a decision on whether to divest Orogen's mineral assets after the merger deal was bedded down.
Orogen shareholders would hold about 34 percent of the expanded Oil Search under the merger, with the remaining 66 percent held by current Oil Search shareholders.
The largest shareholder will be the PNG government, which is heading for an election this year, with its current 51 percent stake in Orogen diluted down to 18 percent in the new group.
An existing 15 percent cap on non-government shareholding will be removed.
Botten said the deal would be earnings per share and operating cash flow per share accretive, but refused to give further details.
Orogen chairman Lindsay MacAlister, chief executive officer Francis Kaupa and chief operating officer Jeffrey Quartermaine plan to resign from the group.
Oil Search managing director Peter Botten will continue in his current role.