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Has NGE outmanoeuvred the heavyweights?

HAS New Guinea Energy marked a significant point on its development chart by agreeing to sell one of its most prized licenses to super major Exxon – or is it just another example of a junior having to sell out to the top end of town in order to survive? Michael Cairnduff investigates.

This market is particularly unkind to junior explorers when it comes to raising any sort of capital, but NGE has the added hardship of working a project portfolio in one of the most challenging legislative and geographical environments Australian juniors venture.

As if this is not a challenging enough exercise, it is also trying to get its projects up while negotiating with a couple of heavyweight joint venture partners that are unlikely to relish any level of intervention or guidance from junior parties.
NGE announced on July 26 that its wholly owned subsidiary, Kirkland Ltd, had signed an agreement to sell the highly prospective Petroleum Prospecting Licence 269 – in Papua New Guinea’s Western Province – to Esso PNG Robin Ltd, a subsidiary of Exxon Mobil Corp, for $US40 million ($43.7m).
This is not the first time NGE’s assets have successfully attracted Exxon’s attention. In December the company announced the $US15m sale of PPL277 to the Texas-headquartered major.
That licence covers 8022sq.km in the Central Highlands region of PNG. The upside on this deal is a further $20m payment if a commercial production occurs, as well as a royalty.
The reasoning behind the first deal was obvious. PPL277 was the most expensively drilled licence in NGE’s portfolio and was immediately north of the PNG LNG-associated Kutubu, Moran and Gobe oil and gas fields, drawing the interest of ExxonMobil subsidiary, Esso Highlands, and Oil Search, which bought 50% each.
Where the sale of PPL277 was an obvious one, the subsequent decision by NGE to offload its 50% stake in PPL 269 was not so clear – particularly given it had been the subject of significant exploration by operating partner Talisman Niugini (30%) and also attracted the investment attention of Mitsubishi Corp subsidiary Diamond Gas Foreland (20%).
In February 2012, Talisman Niugini’s parent, Talisman Energy, announced a $280m deal to farm-out stakes of nine licenses in Papua New Guinea’s untapped Western province to Japanese conglomerate Mitsubishi, which included the 20% stake it held in PPL269.
At that time, NGE CEO Grant Worner said Mitsubishi’s arrival in the province was a game-changer for the emerging region and had flow-on benefits for NGE. It held a 50% interest in PPLs 268 and 269, which were both involved in that transaction. He said that while different licenses would bring in different valuations, the $280m agreement provided a “good order of magnitude”.
Mitsubishi’s valuation came as NGE continued discussions with potential strategic partners for its then six PPLs in PNG. If the latest deal with Exxon gets the tick of approval, it will leave just four PPLs for NGE to pursue, with an analyst telling PNGIndustryNews.net that three of these had strong prospectivity and the fourth had average indicators.
So, that potentially provides a simple explanation of the motivation behind the latest deal. NGE has been publicly seeking strategic partners in its portfolio of PNG PPLs for at least 18 months and Exxon put a very nice offer on the table at an opportune time.
Or is there a bit more to this story?
It is a relevant question, given the three JV partners in PPL 269 have been tied up since October in ongoing arbitration at the International Chamber of Commerce over this licence. And none of companies involved are prepared to discuss the reasons behind the claims and counter-claims publically, beyond what is required to comply with the continuous disclosure regime.
In its sale announcement last week, NGE said notwithstanding the agreement, Kirkland would continue to pursue its claims in arbitration proceedings with Talisman Niugini and Diamond Gas Foreland over PPL269.
Although there is no transparent reason for the dispute over PPL269, claims of this nature usually result from one or other party being perceived as not fulfilling their obligations to either the joint venture, the project or the jurisdiction in which they operate.
One thing that is clear is that PPL269 has had a rocky road in terms of exploration and for the most part, has not lived up to market expectations.
Drilling started on the primary target within PPL 269, Siphon-1, in July 2011, with Talisman as the operator.
The well was targeting a wet gas prospect about 10km northeast of the Stanley-1 gas condensate discovery separately held by Talisman and Horizon Oil.
On September 19, Talisman announced it had encountered a previously unknown sand formation while drilling Siphon-1 and that they could be hydrocarbon bearing. The sand interval was found while drilling to the target Toro formation at 3831m, with a total depth of 3863m reached.
Shares in New Guinea Energy plunged more than 35% to 6c a few days later when Talisman announced its decision to plug and abandon the Siphon-1 exploration well.
While wireline logging confirmed the presence of hydrocarbons over the Ieru and Toro formations, the reservoirs were found to have porosities of about 6%, tighter than the 10%-20% found in the nearby Stanley discoveries.
NGE responded with a statement saying the poor results were disappointing in light of the seismic and technical work carried out by Talisman prior to drilling and the success of recent wells in the Stanley field.
Could this disappointment have signalled the start of the deterioration in the relationship of the partners?
Whatever the motivation, there is clearly significant tension between the parties. Esso stipulated a walkaway clause in the sale agreement for PPL269, pending the outcome of discussions with Talisman, pointing to a complete breakdown in communication between the existing JV partners.
Certain rights and obligations under the sales agreement do not become pre-binding until a number of initial “conditions precedent” are satisfied over a period of 20 days, concluding August 23, with “Esso permitted to have discussions with the operator during this period and having an absolute discretion to determine whether it is prepared to proceed with the acquisition of [NGE subsidiary] Kirkland’s participating interest in PPL269 or not”.
The conditions precedent are: Esso giving Kirkland a notice that Esso wishes to proceed with the transaction; Kirkland obtaining the consent of the holder of convertible bonds in NGE; and NGE providing a parent company guarantee to Esso.
If these conditions are met, Esso will be required to pay Kirkland a $US4 million deposit.
Regardless of the motivation behind the sale, or whether NGE has given away a prized piece of the farm, it can only be good news for its balance sheet. The company estimates the flow-through increase to the company’s net asset position to be in the order of $18m if the transaction goes ahead.
The funds, according to NGE, put the company in a “terrific position” to pursue what it considers to be attractive exploration opportunities remaining in its portfolio. This plan is consistent with a presentation given at its 2013 annual general meeting, where it pointed to the monetisation of this gas asset to improve its ability to focus on and fund exploration for oil in PNG.
NGE was in a vulnerable financial position prior to this announcement but the market liked what it saw, with the stock closing up 18% to 2.6c at the close of trade on July 26. However, this is a long way shy of the stock’s high of 28c in September 2009, when it had nothing but upside before it.
Perhaps more significant than the short-term positive for NGE’s share price, the amount of cash this deal, if successful, would deliver to NGE represented about 2.5 times the company’s market capitalisation immediately prior to the announcement.
This would undoubtedly put the company in a far more secure position to execute its medium-term plans and be a far better deal than the peppercorn its partners would have likely picked up for its share in PPL269 if the company stayed its course and ended up going to the wall.
The next step for NGE on the exploration front is to turn its focus to the Kaisy-1 lead near the southern coastline of PNG, contained within PPL 267, where the company believes there is potential for the target to initially contain more than 50 million barrels of petroleum in place.
“With the materiality of this lead and its proximity to waterborne transport routes, this target offers an exciting opportunity to significantly change the shape of the company, and to generate near-term production and material revenues,” Worner said last week.
PNGIndustryNews.net publisher Aspermont holds shares in New Guinea Energy.