Exxon, Total Square Off in Battle for Asian LNG Producer

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Two of the world’s supermajor oil firms are in a nascent bidding war for a liquefied natural gas (LNG) producer that holds leases for millions of acres in a natural gas field that holds trillions of cubic feet of reserves in Papua New Guinea (PNG). France’s Total S.A. (NYSE: TOT) teamed up with Australia-based Oil Search to make a $2.2 billion May bid for InterOil Corp. (NYSE: IOC).

On Sunday, InterOil revealed that Exxon Mobil Corp. (NYSE: XOM) had offered a “superior proposal” for the PNG project. The competing bids both offer $2.2 billion for the 6.2 trillion cubic feet of known reserves, but Exxon sweetened its proposal with an additional $7.07 in cash per share for every trillion cubic feet discovered in the Elk-Antelope field up to a total of 10 trillion cubic feet.

InterOil has nearly 50 million shares outstanding currently, placing a value of around $1.3 billion on its offer. Exxon’s basic offer of $45 per share would be paid in Exxon stock. Oil Search’s offer is also all in stock, but the Australian firm trades on the Australian Stock Exchange, which is far smaller than the New York Stock Exchange.

Under the terms of its agreement with InterOil, Oil Search has until July 21 to respond to Exxon’s offer and could receive a break-up fee of $60 million if the Exxon bid is accepted.

Total agreed in May to pay Oil Search $1.2 billion in exchange for a 48% stake in the company after the InterOil acquisition is completed, assuming that the government of PNG exercises its right to take a 22.5% stake in the Elk-Antelope field development.

Exxon already has its own LNG project in PNG, called confusingly PNG LNG, which began operation last year. Oil Search is Exxon’s largest partner in PNG LNG. By combining some operations, PNG LNG could lower the cost of developing the field.

For Exxon a deal of this size is relatively small, but it indicates, perhaps, a willingness by the massive company to use its financial strength to acquire assets at the depressed prices brought on by the collapse of crude oil prices. Spot prices for LNG in Asian markets fell to around $4.25 per million BTUs earlier this year and currently stand at around $5.75. Prices rose to around $20 in Japan in 2013 and around $18 in South Korea.

Strategically, the Asian market for LNG, which is the world’s largest, could be best served by supplies coming from PNG rather than the U.S. Gulf Coast because shipping costs would be so much lower.

InterOil’s traded up about 4% at $49.42 early Monday, a new 52-week high and higher than either Exxon’s or Oil Search’s bid. The stock’s 52-week low is $21.18. Shares jumped by about 40% following Oil Search’s May bid and have traded above $47 a share since early this month.

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