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Oil Search Backs Improved Merger Offer From Santos

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Oil Search said it expects to advise its shareholders to accept an improved merger offer from Santos that would create one of the 20 largest oil and gas companies in the world. A merger would also create an Asia-Pacific LNG powerhouse by combining Oil Search's LNG assets in Papua New Guinea with Santos' operated stakes in the Gladstone LNG and Darwin LNG facilities in Australia. Together, Oil Search and Santos produced around 118 million barrels of oil equivalent in 2020 (about 320,000 barrels of oil equivalent per day), almost half of which was LNG. Counteroffers for Oil Search could still be made by Exxon Mobil and TotalEnergies which operate the PNG LNG and Papua LNG projects respectively in Papua New Guinea. Oil Search holds stakes in both of those projects. The Oil Search Board said it intends to recommend that shareholders vote in favor of the Santos bid, subject to due diligence by both companies and "in the absence of a superior proposal." The board said it sees "strategic logic" in the proposed merger. Revised Proposal Santos has made a new all-stock takeover bid for Oil Search that would create a company with a market capitalization of around A$21 billion (US$15.4 billion). The new proposal values Oil Search shares at A$4.29 each and represents a 16.8% premium to Oil Search's share price on Jul. 19. It would leave Oil Search’s shareholders with a stake of around 38.5% in the merged company while Santos shareholders would own about 61.5%. The new proposal comes after Oil Search rejected an initial offer made in late June valuing Oil Search shares at A$4.25 each (IOD Jul.20'21). A due diligence process has already started and is expected to last around four weeks. If the merger goes ahead, Santos would end up with a 42.5% stake in PNG LNG, which would be more than operator Exxon's 33.2% interest. Oil Search currently holds a 29% stake in PNG LNG, which is already producing, while Santos holds 13.5%. Oil Search also holds a 17.7% stake in the proposed Papua LNG project, which has not been built yet. Santos is not currently part of that project. Investment firm Bernstein said the new proposal from Santos still undervalues Oil Search, raises many questions and could lead to tensions among the stakeholders in Papua New Guinea's LNG sector. Bidding War? Rival bids for Oil Search may yet emerge from Exxon and Total. An acquisition of Oil Search by Exxon would give the US supermajor 62.2% of the PNG LNG project. Exxon could also increase its 28.7% stake in the Papua LNG project to 46.4% if it were to take over Oil Search (IOD May5'21). That would potentially enable Exxon "to challenge Total for the operatorship of the Papua LNG project," Bernstein said. Total could also make a counterbid with the aim of securing a stake in the PNG LNG project, in which it currently does not hold an interest. Woodside is another possible bidder for Oil Search, although that company's current lack of a permanent CEO could make it difficult for it to compete in a bidding war, according to Bernstein (IOD Apr.22'21). Marc Roussot, Singapore

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