Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

HK Type 4 license through Ballingal Investment Advisors Ltd. 

I'm a highly experienced sell-side analyst with in excess of 22 years of covering Asia Pacific equities, the past 19 years immersed in event strategies encompassing M&A risk arbitrage, directional long/short, stub trades and restructuring.  

My background also includes accountancy (liquidation/bankruptcy/receivership) earlier in my career and as a chief financial officer of a global commodity company based in the US and Mexico.

Pan-Asia Catalysts/Events

Oil Search (OSH AU): Scheme Booklet Out. Meeting on 7 December

Santos/Oil Search: Getting Facts Straight

Quiddity Advisors

Event-Driven

After submitting a confidential, non-binding, indicative all-scrip merger proposal to <a href="https://www.smartkarma.com/entities/oil-search-ltd" target="_blank" data-smartkarma-citation="entities:773:1" rel="noopener">Oil Search Ltd (OSH AU)</a>'s board on the 25 June, <a href="https://www.smartkarma.com/entities/santos-ltd" target="_blank" data-smartkarma-citation="entities:711:1" rel="noopener">Santos Ltd (STO AU)</a> <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02402372-2A1313090?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">bumped</a> the scrip consideration on the 2 August by 6.5% to 0.6275 new Santos shares for every OSH share.  This would give OSH's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price.  The OSH board recommended the Offer in the absence of superior proposal, and due diligence was afforded.
This morning, Santos and OSH <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02420086-2A1322734?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">entered into</a> a definitive agreement to merge the two companies in an all-scrip transaction. The scrip ratio remains unchanged. 
The OSH board has unanimously recommended shareholders vote in favour of the merger in the absence of a superior proposal.
The merger would create a major regional player with a pro-forma market cap of ~A$21bn. Santos expects the merger to unlock pre-tax synergies of US$90-115mn per annum.
The merger is subject to OSH shareholder approval, regulatory approvals, and Papua New Guinea (PNG) court approval.
It's that last approval that could prove to be a sticking point.  
Santos has a 13.5% interest in PNG LNG, behind <a href="https://www.smartkarma.com/entities/exxon-mobil-corp" target="_blank" data-smartkarma-citation="entities:811:1" rel="noopener">Exxon Mobil (XOM US)</a>'s 33.2% and OSH's 29%. OSH also holds a 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.
In a recently completed <a href="https://www.coiubsl.com/" target="_blank" rel="noopener">royal commission</a> involving complex UBS loans, the bank maintained the fees it charged the PNG government to borrow $1.2bn in 2014 to purchase a 10.1% stake in OSH were appropriate. The PNG government was compelled to <a href="https://www.reuters.com/article/papua-oil-search-idUSL4N1M23EF" target="_blank" rel="noopener">sell</a> that stake in 2017 when OSH's shares fell and it did not have the necessary funds to put up extra capital for the loan. Contrary to PNG's former PM comments that it made A$39mn on the deal, the commission heard PNG lost US$432mn. 
In <a href="https://skr.ma/epYxh" target="_blank" rel="noopener">Santos/Oil Search: Getting Facts Straight</a>, I wondered if this less-than-satisfactory situation might resurface in any government approval process for a Santos/OSH merger.
In various media articles, Deputy Prime Minister Samuel Basil said this week:
<blockquote>
If the merger will result in the weakening of any Papua New Guinean shareholders or shareholder interests, reduction in market liquidity, potential for job losses, potential delisting from PNGX, and loss of local ownership of the company assets to a foreign interest, it is not in PNG’s national interest.
</blockquote>
Such a statement raises the stakes after PNG's PM James Marapoe's earlier <a href="https://www.pmnec.gov.pg/index.php/secretariats/pm-media-statements/336-pm-marape-says-government-is-closely-monitoring-a-proposed-acquisition-of-oil-search-limited" target="_blank" rel="noopener">comments</a> back in August that:
<blockquote>
Oil Search Limited is a prominent PNG company whose activities comprise a significant percentage of PNG’s GDP and provides the livelihood to thousands of Papua New Guineans both directly and indirectly. Any proposed merger must satisfy the national interest test.
</blockquote>
OSH (incorporated in PNG) is listed in both Australia and PNG, however, Santos is only listed in Australia. OSH has around 5,000 PNG shareholders according to Basil.
Should the merger complete, and OSH is delisted - taking with it almost one-third of PNG's market cap - domestic shareholders will have no option but to acquire and trade their shares in Australia, an activity compounded by foreign exchange restrictions. Unless Santos plans to list the merged entity in PNG. 
Basil continues:
<blockquote>
The Board of Oil Search and Santos must explicitly inform Papua New Guinea their plans for PNG capital market development in the context of this merger. Our concern derives from the possibility that PNG will incur significant detriment in the oil and gas sector to a foreign company. It is equal to losing our sovereignty in the oil and gas industry where PNG will have no control over it.
</blockquote>
Put another way: should PNG investment funds re-domicile in Australia, PNG local investors will be cut off from investing (via Santos and OSH) in PNG's large PNG projects.
More below the fold.

After submitting a confidential, non-binding, indicative all-scrip merger proposal to Oil Search Ltd (OSH AU)'s board on the 25 June, Santos Ltd (STO AU) bumped the scrip consideration on the 2 August by 6.5% to 0.6275 new Santos shares for every OSH share.  This would give OSH's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price.  The OSH board recommended the Offer in the absence of superior proposal, and due diligence was afforded.
This morning, Santos and OSH entered into a definitive agreement to merge the two companies in an all-scrip transaction. The scrip ratio remains unchanged. 
The OSH board has unanimously recommended shareholders vote in favour of the merger in the absence of a superior proposal.
The merger would create a major regional player with a pro-forma market cap of ~A$21bn. Santos expects the merger to unlock pre-tax synergies of US$90-115mn per annum.
The merger is subject to OSH shareholder approval, regulatory approvals, and Papua New Guinea (PNG) court approval.
It's that last approval that could prove to be a sticking point.  
Santos has a 13.5% interest in PNG LNG, behind Exxon Mobil (XOM US)'s 33.2% and OSH's 29%. OSH also holds a 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.
In a recently completed royal commission involving complex UBS loans, the bank maintained the fees it charged the PNG government to borrow $1.2bn in 2014 to purchase a 10.1% stake in OSH were appropriate. The PNG government was compelled to sell that stake in 2017 when OSH's shares fell and it did not have the necessary funds to put up extra capital for the loan. Contrary to PNG's former PM comments that it made A$39mn on the deal, the commission heard PNG lost US$432mn. 
In Santos/Oil Search: Getting Facts Straight, I wondered if this less-than-satisfactory situation might resurface in any government approval process for a Santos/OSH merger.
In various media articles, Deputy Prime Minister Samuel Basil said this week:

If the merger will result in the weakening of any Papua New Guinean shareholders or shareholder interests, reduction in market liquidity, potential for job losses, potential delisting from PNGX, and loss of local ownership of the company assets to a foreign interest, it is not in PNG’s national interest.

Such a statement raises the stakes after PNG's PM James Marapoe's earlier comments back in August that:

Oil Search Limited is a prominent PNG company whose activities comprise a significant percentage of PNG’s GDP and provides the livelihood to thousands of Papua New Guineans both directly and indirectly. Any proposed merger must satisfy the national interest test.

OSH (incorporated in PNG) is listed in both Australia and PNG, however, Santos is only listed in Australia. OSH has around 5,000 PNG shareholders according to Basil.
Should the merger complete, and OSH is delisted - taking with it almost one-third of PNG's market cap - domestic shareholders will have no option but to acquire and trade their shares in Australia, an activity compounded by foreign exchange restrictions. Unless Santos plans to list the merged entity in PNG. 
Basil continues:

The Board of Oil Search and Santos must explicitly inform Papua New Guinea their plans for PNG capital market development in the context of this merger. Our concern derives from the possibility that PNG will incur significant detriment in the oil and gas sector to a foreign company. It is equal to losing our sovereignty in the oil and gas industry where PNG will have no control over it.

Put another way: should PNG investment funds re-domicile in Australia, PNG local investors will be cut off from investing (via Santos and OSH) in PNG's large PNG projects.
More below the fold.

Oil Search/Santos: PNG a Potential Party Pooper