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Even the losers may win as Exxon outbids partner for PNG gas

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PORT MORESBY, Papua New Guinea (Bloomberg) — Being outbid by Exxon Mobil Corp. for prized Papua New Guinea natural gas assets might actually be a good thing for Oil Search Ltd.

Shares for the Sydney-based company settled at the highest level since March 10 after it announced that Exxon topped its bid to buy InterOil Corp., the Papua New Guinea-focused gas explorer. Exxon is a partner with Oil Search in the country’s only LNG terminal, PNG LNG. Oil Search is also a partner, along with InterOil and Total SA, in another proposed gas exportproject, Papua LNG.

When Oil Search made its $2.2-billion offer for InterOil in May in conjunction with Total, it did so with the idea that it could save money and increase returns by integrating the two projects. Having Exxon take InterOil’s place in Papua LNG would accomplish the same goal at none of the cost. Exxon’s bid values InterOil at $2.5 billion.

“We see all parties as benefiting from this arrangement, but the biggest winners are InterOil and Oil Search,” Neil Beveridge, a Hong Kong-based analyst for Sanford C. Bernstein, said in a July 18 note. “For Oil Search, they get the alignment without dilution.”

Cooperation between the country’s two LNG projects could speed development and save as much as $3 billion, Oil Search Managing Director Peter Botten said in May, when it was proposing to spearhead the integration. The company reiterated that stand Monday after Exxon submitted a superior offer.

Well Placed

“Given its existing material interests in both the PNG LNG Project and in the Papua LNG Project, Oil Search is well placed to participate in the potentially very significant benefits that are expected to arise from cooperation between, and/or integration of, the projects,” Oil Search said in a written statement Monday. Shares settled up 3.9% at A$7.25 Monday on the Australian Stock Exchange.

Oil Search and Total have until July 21 to decide whether they want to counter Exxon’s bid. Neither company is likely to do so, Deutsche Bank analysts including John Hirjee said in a note Monday. Oil Search is a net beneficiary of a successful Exxon bid, while Total would face higher development costs without Exxon as a partner, Hirjee said.

Exxon offered InterOil $45 per share, while Oil Search and Total’s deal amounted to $40.25. Both Exxon and Oil Search offered to sweeten the deal if InterOil’s crown jewel, the Elk-Antelope field, is found to have more than 6.2 Tcf of gas reserves. Exxon’s sweetener is higher initially, offering $7.07 per share for each Tcf of likely gas reserves above 6.2 Tcf, capped at 10 Tcf. Oil Search offered an additional $6.05 per share for each Tcf more than 6.2 Tcf, with no cap.

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