PNG government sells its stake
While no notices have been given to the ASX, the media has indicated that the PNG government has divested its 10% share interest in Oil Search (OSH). According to numerous press articles, the bank that lent the PNG government US$1bn in debt to buy its stake in OSH was holding the government's OSH shares as security over the loan and had been gradually selling down the position on-market. Several articles put the volume previously sold on-market at a staggering 118 million OSH shares (or approximately 8% of OSH's market cap). Therefore the recent block trade is the sell down of the remaining 31.3 million shares.
No change in relationship between OSH/PNG expected
Importantly we do not expect the government sell down of its 10% stake in OSH to signal any change in their relationship. This is the second time the PNG government has divested its share interest in OSH, and like the first time we expect it to be a case of the government needing the capital to fund its share of LNG growth at a project level. In divesting its stake, the PNG government has now removed a US$1bn debt facility (several tranches of which were due to mature in 2018).
It makes sense to us that the PNG government would raise as much capital as possible ahead of needing to stump up significant capital to invest in the next leg of growth in PNG (and before the debt matures). We expect this will help to increase confidence around timing for development of Papua LNG/PNG LNG growth. Furthermore, this also simplifies OSH's share register which as a result boosts OSH's corporate appeal.
The PNG government is now in a better position to pursue a new funding package to participate in development of Elk/Antelope, Muruk and P'nyang. In our view this could involve the PNG government putting together a combination of new debt, forward sales of Elk/Antelope cargoes (its share), or even selling down some of its interest in the project to Japanese or Korean offtake partners (something more common in the coal industry).
We expect the next major catalyst for OSH will be the forming of the co-operation agreement between PNG LNG and Papua LNG around year end. We note Elk/Antelope progressing into FEED was a priority in the new PNG government's 100-day plan.
We retain our Add recommendation. The key risk to our recommendation remains the oil price.
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Disclaimer(s): Analyst owns shares.
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