Webcast Transcript: Acquisition of InterOil and MoU with Total

An Open Briefing interview with

Company:	Oil Search Limited
Title:	Acquisition of InterOil and MoU with Total: Creating a Major Independent PNG Regional Oil & Gas Champion
Date:	20 May 2016

Start of Transcript

Peter Botten: Good morning, ladies and gentlemen. Thank you for finding the time to attend and listen into this Oil Search shareholder and investor briefing this morning. I know there are lots of important things going on for you and other events happening, so I really appreciate the ability to talk to you this morning, along with my management team. My name is Peter Botten, I'm the CEO of Oil Search. With me today is the Executive General Manager for Exploration and New Business, Dr Keiran Wulff; our CFO Stephen Gardiner; and our EGM for Gas and Gas Commercialisation, Ian Munro. It's a real pleasure to talk to you today.

Obviously, I believe this is a very important day for Oil Search and in turn all shareholders. I know this is a somewhat hackneyed phrase, but the combination, or the potential combination, of Oil Search and InterOil is a compelling - has compelling and very strong rationale. The companies together aligned allows us to be hugely influential in the further development of our world class PNG, LNG and Papua LNG assets. It is a very important combination - it isn't just standalone - it is a combination of two companies that have very close asset alignment, very close direction of delivery of superior returns to shareholders. This combination sets a platform for significant further growth of our business in [what is] high returning, low cost LNG assets primarily.

I'm going to turn to the first page, or page 3 of the slide pack right now, if you could go there. Obviously, as I say, the deals we announced today - there are two of them - provides a platform to deliver the high returns and to optimise further LNG development for Oil Search. The first deal announced is the acquisition of 100% of InterOil, obviously subject to shareholder approval. The second one is an execution of a Memorandum of Understanding with Total for a back-to-back farm-out of assets from the InterOil acquisition and the alignment of Oil Search and Total in how we approach LNG development for Papua New Guinea. The agreements reached result in Oil Search increasing its stake in Papua LNG to about 29% after government take. It's about the same as we have in PNG LNG. Obviously, the presence of Total in this back-to-back arrangement de-risks this InterOil acquisition for Oil Search shareholders.

The agreements are expected to deliver both material, immediate and long term strategic and financial benefits for shareholders, for both Oil Search and InterOil. Oil Search I say achieves alignment with significant equity interests in two world-class LNG assets. Our shareholders gain increased interest in Papua LNG, providing the potential between PNG LNG and Papua LNG to more than double production from now to 2022 - 2023, and also allows all shareholders to have access to the upside of the surrounding exploration acreage. All this can be done while maintaining a strong and flexible balance sheet. It does provide a pathway to optimise cooperation and/or integration between Papua LNG and PNG LNG, driving capital efficiencies, superior returns and NAV per share accretion for Oil Search shareholders through this transaction.

InterOil shareholders receive immediate value at a significant premium and access to further potential upsides through shareholding in Oil Search, and also the possible resource-based payments through the contingent value right, the CVR. Agreements and consummation of these agreements provide additional scale to Oil Search, leveraging our high quality, low cost production base, our balance sheet strength, excellent growth opportunities, and leading in-country relationships. In summary, we think these deals represent a win-win for both Oil Search shareholders and InterOil shareholders and locks us both into a platform for future growth where we can influence that direction directly for our interests and our alignment with Total.

Some of the deal highlights - and I'm now on slide 5. Obviously this will create a major independent PNG regional oil and gas champion, working closely with the government entity in PNG to deliver maximum value for our assets there.

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The offer price is Oil Search agrees to acquire 100% of InterOil Corporation for 8.05 Oil Search shares for each InterOil share plus the contingent value right. The share consideration has an implied share value of US$40.25 per share. Oil Search also provides InterOil shareholders with a cash alternative up to a total of US$770 million. InterOil shareholders will own approximately 21% of the entity, subject obviously to how many shareholders wish to take cash in this transaction.

The contingent value right is equivalent to $6.05 per InterOil share for each incremental tcfe above 6.2 tcfe, assessed for the Elk-Antelope field. The CVR payment is triggered on an Elk-Antelope field proven and probable resource-based certification, which I'll talk about later. Subject to receiving confirmation from the ASX, the CVR will be structured and listed as a debt instrument on the ASX.

I'm pleased to say that the InterOil acquisition has been unanimously supported by InterOil and Oil Search Boards. The InterOil Board has unanimously recommended the transaction - that InterOil shareholders vote to approve the transaction. One current InterOil director will join the Oil Search Board.

Following the successful completion of the Oil Search offer, Oil Search plans an on-market share buyback to reduce the dilution to Oil Search shareholders. The final size of the share buyback will depend on the take-up of the cash alternative but will not exceed US$770 million.

The InterOil acquisition is structured as a Plan of Arrangement under the Business Corporations Act of Yukon, would you believe. The process is similar to an Australian Corporations Act Scheme of Arrangements. The conditions include InterOil shareholder approval, which is 66.66% of shareholders voting is replied in the affirmative; and on condition of court approval. We expect completion sometime in the third quarter of 2016.

Moving onto slide 6. The InterOil shareholders benefit from the uncapped upside potential in the Elk-Antelope field resources. The CVR is payable in cash to InterOil shareholders based on the results of the interim resource certification of the Elk-Antelope fields. The payment to InterOil shareholders and the CVR of share [inaudible] is based on $0.77 per mcfe for proven and probable resources over 6.2 tcfe, on 40.1275% interest sold to Total, divided by the number of InterOil shares, 51.1 million shares. The CVR is equivalent, as I said, to about $6.05 per share above 6.2tcfe. That CVR is expected to be paid in the first half of 2017, importantly following the recently approved drilling of the Antelope-7 well, with that information feeding into the independent review process to assess the resources on that field.

The benefits then for InterOil shareholders is that they gain direct exposure to the uncapped upside, it ensure InterOil shareholder retain upside of the resource-linked payment under the Total 2014 sale. It also highlights that the higher resources we get is beneficial to Oil Search shareholders in the future, in that it could tip us into a two train development, which is obviously beneficial for all stakeholders.

In the way that this resource will be assessed is that a Board subcommittee of Oil Search, with an InterOil appointee and independent chairman, will be established to oversee a fair and transparent resource certification process for the CVR. Importantly, this transaction is approximately 60% funded by the sell-down to Total. It's subject, obviously, to receiving confirmation from the ASX; the CVR is expected to be structured as a listed entity, which again, makes that instrument attractive.

I move now to slide 7. The share consideration delivers immediate and significant premium for InterOil shareholders. It's about a 27.2% premium to InterOil's last closing price, and a 32.5% premium to InterOil's three-month VWAP. There is uncapped upside in the Elk-Antelope fields. Importantly, we think the drilling of Antelope-7 will be pivotal in understanding the upside resource of this field.

The InterOil shareholders gain somewhere between 14% and 21% interest in the combined company, subject obviously to how far the buyback and how many people want to take cash instead of shares. The exposure for those shareholders is to the world-class Oil Search assets, including the PNG LNG Project and of course the potential developments out of

PRL15 to Elk-Antelope. Those assets have very high quality, low cost production base, and an excellent growth opportunity with the potential, I would say, to build more trains, expand PNG LNG further and obviously build Papua LNG. It establishes a platform for a stronger balance sheet to drive growth from our low cost assets and maximise our returns. Obviously all shareholders benefit from our ongoing very strong operating platform and relationships that we have in Papua New Guinea.

If I move now onto slide 8, which describes the Memorandum of Understanding between Oil Search and Total. I should say that this is a critical agreement between the two companies, to align ourselves in how we develop Papua LNG. The MoU is expected to deliver very significant value to Oil Search and InterOil shareholders, as well as obviously Total shareholders. It underpins the value of the InterOil acquisition that Oil Search is making and immediately de-risks our acquisition of InterOil, delivering certainty and incremental liquidity for Oil Search and the InterOil shareholders.

It establishes very much a long term alignment between Total and Oil Search, with the material interest that we hold in Papua LNG. It also provides an avenue to maximise the value of Papua LNG through pursuit of cooperation and/or integration opportunities with PNG LNG. As most people know, we've been a champion of a requirement for cooperation, especially in this time of high LNG competition and low LNG and oil pricing. Even on a standalone basis, the alignment with Total can deliver a robust standalone project, and that's an important factor. But equally, it has the capacity to deliver a very strong combined project if that is possible as we cooperate with other LNG participants in PNG. It does require, and has in this transaction, equity available for parties to further participate in Papua LNG, an important fact in any cooperative arrangement that might be made.

I'll now move onto the strategic rationale on slide 10. I've mentioned some of these before, but obviously this is a difficult challenging LNG market and the only ones that will succeed over the next four to five years are ones at the lowest cost base with the highest return. We believe, based on the track record in PNG, the fundamental fiscal regime in Papua New Guinea, and the ability to develop these fields in a cooperative way, delivers up the best possible opportunity to build further world-class LNG projects in our region.

The assessment of the Elk-Antelope resource is important in this aspect, in understanding the size and shape of the potential development of Papua LNG and the potential cooperation between the two projects. Papua LNG has the potential to be further enhanced by that close cooperation, and the agreements create opportunity to commence a pathway to that cooperation and integration of the two projects themselves. We will play an undoubted facilitation role, and with this deal, a very important facilitation role in seeing that take place. It therefore aids in the maximisation of returns and capital efficiency for strong future growth.

Moving onto that cooperation, a little bit more detail. As I mentioned, the agreements pave the way for potential material CapEx and OpEx savings in any future development. It also looks at - has the potential for schedule acceleration of Papua LNG, facilitating the superior returns and NAV per share accretion for Oil Search shareholders. The focus in 2016 is on resource confirmation and definition of the development, and that will allow definition of the development plans.

There is a very strong case, I'd say, to get together and cooperate. The current oil price and cost environment is very much conducive to alignment of the joint venture interests and to build something. As I say, Oil Search's role is unique in that we do straddle the two major projects there, and we're well-positioned to support the operators, ExxonMobil and Total, to promote the benefits of cooperation. I should say the PNG Government is fully behind this transaction and fully behind the development of a cooperative process for both PNG, LNG and Papua LNG.

Moving onto slide 12. Along with this transaction and with the IOC transaction, you see a very strong material exploration portfolio that supports long term focused growth in the country. It really is a quality exploration portfolio, a world-class exploration portfolio with multiple play types and growth opportunity. Although exploration will continue to be carried out in a measured way which is designed to support our short, medium term development opportunities, the

quality of the combined assets is really, really outstanding. That exploration activity together in the InterOil assets has the support of Total to continue to further develop and appraise those fields and those exploration assets.

I'm now going to turn to our CFO, Stephen Gardiner, who will walk you through the expected financial impacts and some of the financial aspects of this transaction. So Stephen, over to you.

Stephen Gardiner: Thanks, Peter, and good morning, ladies and gentlemen. Let me start by saying that the acquisition and the subsequent sell-down to Total has been structured to strengthen the overall financial position of Oil Search.

We're starting from a very sound financial position anyway, and with this transaction, we expect to continue to be able to generate positive cash flows, even at oil prices well below current levels. With the transaction, we expect no change to our dividend policy, and continue to expect to distribute 35% to 50% of core profits after tax.

The cash alternative component of the offer to the InterOil shareholders will be funded from our current liquidity, which at the moment is in excess of US$1.6 billion. Obviously that will be further supplemented by the sell-down proceeds we receive from Total under the MoU. To the extent that any of the InterOil shareholders don't take up the cash alternative, then we'll distribute that cash back to our shareholders by way of an on-market share buyback. The intention there, as Peter has mentioned, is to reduce dilution to our own shareholders.

Under the Total MoU we will [inaudible] in the order of US$1.2 billion, and we will receive that shortly after closing. After we receive that money we will see a substantial improvement in our overall balance sheet and our liquidity position. We will see our net debt position decline to about $3 billion, from the current level of $4.2 billion, after completion of the acquisition, and also see our liquidity increase by US$300 million. So overall a very positive impact on both our liquidity position and our balance sheet, and also it affirms our ability to continue to fund our growth projects including Papua LNG.

Peter Botten: Thank you, Steve. Obviously Stephen and our management team are available for questions at the end of this presentation.

If I now move to slide 16, which is the timetable to completion. You can see that under the Plan of Arrangement, there is a process which will potentially [inaudible] through to mid to late July, through transaction announcement, preparation of documents, the shareholder vote at InterOil, Canadian court approval and then completion. On that basis, we will be working very closely with our InterOil colleagues to ensure that all shareholders, both Oil Search and InterOil shareholders, are fully appraised of the merits of this transaction in an open and very transparent way over the next few months, so people are fully informed about the merits of what we are doing here.

With that in mind, I now come to the end of our formal part of the presentation. As I say, I think it's a really exciting day for Oil Search, for InterOil shareholders, and also Papua New Guinea. It aligns two home grown entities in Papua New Guinea, it combines those entities to be hugely influential in the future development of these world-class, high returning assets. It gives us the platform for further growth, it aligns our interests with a major, it allows us an ability to an agreement - agreed process to cooperate across our portfolio. I think it's an outstanding deal and one that I hope, I'm sure, our shareholders will like when they fully understand what we've done today.

With that in mind, I'll throw it open to questions and look forward to our management team replying accordingly. So over to the ether. There are no questions? I find it very hard to believe that there are no questions on this outstanding transaction, so I don't know if there's a technical fault, but that's something…

Operator: We have a question on the phone, if you'd like to proceed. Peter Botten: Oh good, thanks. I'm deeply relieved.

Operator: We have a question from the line of Dale Koenders from Citigroup. Please go ahead.