With material resource of 1B barrels, is Pikka undervalued?

Kay Cashman

Petroleum News

Among the prospective oil projects today, Oil Search’s Pikka Phase 1 development on Alaska’s North Slope is in the top 25% for the lowest GHG intensity, per Wood Mackenzie’s emissions benchmarking tool.

On schedule to come online in 2025 at a breakeven price of less than $40 a barrel, a target development IRR of less than 20%, the first phase of the Pikka project will deliver 80,000 barrels of oil per day.

Independently verified 2C gross reserves for Pikka 1 are 413 million barrels; with total Pikka 2C gross resource at 768 million barrels, and the material resource at 968 million barrels.

Some investors are questioning the value of Oil Search’s proposed $14 billion merger with competitor Santos, which will include Pikka and other nearby major oil discoveries in Alaska. Under the current non-binding indicative merger proposal, Oil Search shareholders would own 38.5% of the merged company as compared with the 61.5% share for Santos shareholders.

But the merger is far from complete. The next steps are critical:

* Each company must complete its due diligence on the other, which is anticipated to conclude in early September.

* During the due diligence period, the parties negotiate a merger implementation deed which, if agreed to, is entered when the due diligence is satisfactorily complete.

* Oil Search must prepare and send to its shareholders a Scheme Booklet containing information on the proposed transaction.

* An Independent Expert Report must be done. Grant Samuels & Associates has been retained to do it. If they conclude the merger is in the best interests of Oil Search shareholders (and that no superior proposal has been received), their report will be included in the Scheme Booklet to shareholders.

* The report and Oil Search’s due diligence must include an appraisal of the company’s value - including the worth of its Alaska acreage, which some investors and observers say is currently undervalued.

* An Oil Search shareholders meeting must be held to consider the scheme (expected to happen by the end of the year). In order to proceed, the merger with Santos must be approved by 75% or more of the votes cast.

* Assuming shareholder approval is obtained, and that all regulatory approvals are in hand, shareholders will be able to exchange Oil Search shares for the new shares in Santos.

In its half year results presentation on Aug. 24, Oil Search acting chief executive Peter Fredricson said the board would consider competing propositions but was not actively seeking a better offer.

“I noticed that we were asked by a shareholder today if we had gone out and knocked on the doors of everybody else. But when we’re in a process like you’re in, you sign non-disclosure agreements and typically they’ll include ‘no shop, no talk’ type restrictions. And we’re in that environment today.” But, Fredricson added, “if something else was to come in the door that led to a better outcome, then we have the ability to step away from the Santos transaction.”

Slow Alaska sell-down

The sell-down is underway by which Alaska operator Oil Search and its partner Repsol would sell up to 30% (likely 15-15 each) of their interest in Pikka, and possibly nearby acreage to a third party. This is part of de-risking the project and a common practice for major oil and gas developments on the North Slope and around the world. Oil Search is the lead on the sell-down process and has said they are dealing with/have talked to several parties.

Given the favorable coverage Pikka has received worldwide in industry publications - and by independent project analysts - it’s not surprising there is interest. For example:

- Independent Project Analysis: “As of June 2021 ... the Pikka Phase 1 Project has been defined to the best level for a project at this stage” (IPA is a benchmarking, research, and consulting organization devoted to the empirical research of capital projects and project systems.)

- Ryder & Scott: “The Front-end Loading (FEL) is well-planned for a major project of this nature, and, in our opinion, the Project is set up for success.” (Oil and gas engineering and geological consultants known worldwide for quality, reliability and integrity.)

In the meantime, it is business as usual for Oil Search operations in Alaska and elsewhere.

“Transactions … don’t always run full course and get approved, so our focus is on continuing to run the business,” Fredricson said Aug. 24 on the heels of Oil Search reporting an almost six-fold rise in its core profit to $139 million for the first half the year.

In the meantime, the process that is designed to bring Pikka 1 online is moving forward.

Dingeman: Alaska progress

The Santos deal withstanding, in support of efforts toward the final investment decision by Oil Search and Repsol, the current summer field program is nearing completion. Work is focused on final preparation of the Pikka 1 gravel roads and pads, initially installed in the winter of 2019-20, for use during the next phase of construction.

With the technical aspects of the Pikka project tracking well to schedule and FEED nearing completion, Oil Search and Repsol are focused on ensuring appropriate risk allocation and funding is in place prior to taking FID.

They continue to pursue a range of funding options, including the sell-down of up to a 30% equity interest, the sale of midstream infrastructure and other non-recourse debt funding options.

When asked about the dollar value of monetizing their midstream infrastructure, Fredricson said that monetizing midstream infrastructure around globe has become very popular. The difference with Pikka is because it will all be new infrastructure with much of it yet to be built.

“The value of the build in Phase 1,” Fredricson said, is a total of “$2.6 billion with $1.1 billion allocated to drilling and $1.5 billion for infrastructure. We’ve talked between $900,000 and $1.2 billion for infrastructure downstream as the opportunity.”

Dingeman touted the fact that most of the 700 permits and approvals needed for the project are in hand; in particular two key approvals - the Land Use Agreement with Kuukpik Native Corp. and the permits from the U.S. Army Corps of Engineers.

When asked about the recent negative court decision on the Willow project’s EIS, Dingeman said Oil Search couldn’t comment on behalf of ConocoPhillips. He also noted that Oil Search’s circumstances were different with Pikka, because the project is on state, not federal land, and that the Pikka EIS was “already established, we’ve already put gravel in place.” And while not impossible, a court challenge was therefore “less likely” at this stage.

“Pikka is … poised to play an important role in improving Oil Search’s GHG emissions intensity,” Fredricson said. “The Pikka project is aligned with the objectives of the Paris Agreement.”

- KAY CASHMAN