More M&A Action: Oil Search Ltd. Takes Over InterOil For $2.2B

Papua New Guinea-based Oil Search Ltd. has negotiated a $2.2 billion deal to take over 100 percent of US-based InterOil Corp. (NYSE:IOC) in an effort to consolidate natural gas developments in Papua New Guinea.

Oil Search Ltd., based in Papua New Guinea but listed in Australia, said both boards agreed to a price of US$40.25 for each InterOil share. Compared to IOC’s May 19 closing price of $31.65, Oil Search paid 27 percent more than market price.

InterOil has a market cap of $1.56 billion and negative earnings.

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The $2.2 billion deal would not have been possible without the help of French Total SA, to whom—in a separate deal—Oil Search has agreed to sell about 60 percent of its newly acquired InterOil’s PNG interests for an upfront fee of US$1.2 billion, leaving Oil Search with 40 percent of what was once InterOil.

In addition to the $1.2 billion paid up front, Total has agreed to pay Oil Search an additional $141 million in July of next year, and another $230 million when the companies officially sanction the Papua New Guinea project, according to Total’s 20 May press release.

In the end, this means French Total is taking on roughly $1.6 billion—or 72 percent—of the cost to buy out InterOil, and is receiving about 60 percent of the assets.

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The deal comes as somewhat of a validation for InterOil, whose assets have come under great scrutiny in recent years, as evidenced by a large number of investors who consistently have shorted relatively unknown InterOil stock more than any other energy stock, by naysayers who questioned the legitimacy of InterOil’s natural gas discovery claims, and by rumors of fraud.

Oil Search—and Total SA—apparently have a more favorable view. Oil Search is banking on the InterOil acquisition to expand Oil Search’s existing LNG stake in the country—a US$19 billion LNG joint venture in Papua New Guinea (PPN) with Exxon Mobil Corporation.

With InterOil now out of the mix, PPN’s LNG interests are held by fewer players, hopefully paving the way for Exxon, Total, and Oil Search to consolidate their efforts—a move that could mean $3 billion in savings and accelerated development, according to Oil Search' Managing Director, Peter Botten.

“This transaction allows us to influence the major operators in PNG to have a sensible economic outcome for the development of these projects.”

By James Burgess of Oilprice.com

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