Papua New Guinea’s largest company, Oil Search, is proposing to raise US$700 million (K2.4 billion) to strengthen its balance sheet in response to declining oil prices. The company’s stake in the PNG LNG project may also eventually be on the table.

Hides is one of the seven gas fields associated to the PNG LNG project. Credit: Oil Search

A statement from the company, entitled A Proactive Response to Low Oil Prices said that the offer, which is also being made to Papua New Guinean investors, will be priced at $A2.10 (K4.46) per share.

There are reports that Chief Executive Keiran Wulff has revealed that Oil Search will, if necessary, consider selling part of the company’s main asset, its 29 per cent stake in the PNG LNG venture.

‘There are some parties that have expressed interest in the asset that would require a longer-term review, and we always are open to divesting part of assets at the right price,’ Wulff reportedly said.

Cost cutting

The company has indicated it will slash expenditure and costs. Capital expenditure will be reduced by 40 per cent below the 2020 forecast levels: from US$710–845 million to US$440–530 million. Capital expenditure for next year is also expected to be ‘materially lower than 2020 if market conditions remain unchanged’.

‘The outcome of these initiatives is that Oil Search will be a much leaner and more profitable operator.’

Operating expenditure is also to be reduced sharply with salary cuts, headcount reduction and discretionary expenditure cuts. There will be a systematic review of further operating expenditure and corporate overhead cost reductions.

‘The outcome of these initiatives is that Oil Search will be a much leaner and more profitable operator, able to withstand prolonged periods of subdued oil prices,’ the company claims.

Oil Search is aiming to reduce production costs from US$11.5/boe (barrel of oil equivalent) to US$9.5–10.5/boe.

There is no change to the company’s 2020 production guidance of 27.5–29.5 mmboe (million barrels of oil equivalent), with 2020 first quarter production of 7.3 mmboe.

Debt and equity

Oil Search’s Kieran Wulff.

The main reason for the capital raising is to reduce the company’s debt levels.

Before the proposed share raising, Oil Search’s gearing (level of debt, as a proportion of the company’s total capital) was 36 per cent, according to the company’s 2019 annual report. After the raising, the company’s gearing will fall to 28 per cent, the company says.

When the placement is complete, the money available to the company (cash and undrawn debt) will increase to $US1.835 billion (K6.3 billion).

Oil Search says that 85 per cent of its debt relates to money it borrowed to finance the PNG LNG project. This is secured against the PNG LNG project assets.

The company says it has enough cash to meet ‘almost all PNG LNG project finance principal and interest payments due in 2020.’

‘Preliminary discussions with lenders indicate ongoing support for Oil Search.’

According to one newspaper report, a $US300 million (K1 billion) loan maturing in September this year has been extended to June 2021, subject to the successful completion of the share sale.

‘Preliminary discussions with lenders indicate ongoing support for Oil Search and willingness to consider covenant waivers, should they be required,’ the company said.

Conditions of sale

The share offer is priced at less than a third of the company’s January stock price high of A$7.92 dollars (K16.98). Due to ‘local regulatory requirements’ the Retail Entitlement Offer will not be made to retail shareholders (‘mum and dad shareholders’) in PNG, the company has said.

However, Oil Search has also announced an offer of shares to ‘eligible residents in PNG, which is being made on substantially the same terms as the Retail Entitlement Offer’.

The offer closes on 27 April and the shares will be allotted on 4 May.