By Brian Kramer
There has been many misreporting and misconception on the IPIC deal and recent UBS Loan so for the benefit of the readers I have provided a simple explanation to hopefully better help people understand the issues
International Petroleum Investment Company (IPIC) deal was not a loan. In March 2009 we sold our 17.6.% equity (shares) in Oil Search to IPIC to raise $1.7b to fund our equity (19.6%) in the PNG LNG Project.
At the time Oil Search shares were only worth just short of $5 per share and the total shares were not worth anywhere near the $1.7b we needed. So we sold them under a special share sale agreement on its projected future value in 5 years time (2014) once the construction on LNG Project was complete which was projected to be $8.55 per share.
To get IPIC to agree to this deal certain securities (collateral) were put in place IPBC SOE’s assets (PNG Power, Air Niugini etc) to underwrite the difference between what the shares were worth at the time $5 and the future strike price of $8.55. This representing what we still owed to complete the sale. This sale agreement was put in place using exchangeable bonds. A form of security (like a land title) used to exchange for shares. In this case oil search shares, we gave them the shares and they gave us exchangeable bond (asset swap) and $1.7b cash. In addition we had to pay them interest on the bond until we completed the sale in March 2014.
Further under the agreement should the Oil Search share price not reach $8.55 in March 2014 then PNG Govt would have to pay the shortfall. If the shares did reach $8.55 then we owed nothing and walked away from the sale.
IPIC made provision/condition in the agreement that should PNG Govt fail to meet the difference or default on the agreement then they reserved the right to sell the shares to recover any shortfall. PNG Govt agreed but on the condition they will be given pre-emptive rights. If IPIC decided to sell the shares they would give PNG Govt first right to buy them back. When the sale agreement matured in March 2014 PNG Govt made an offer to buy back the shares. IPIC explained before it could consider selling the shares it requested $70m to meet the shortfall because they claimed the share price was under $8.55. This resulted in a dispute and in end IPIC told PNG Govt forget it they don’t intend to sell the shares.
So was it a good deal or not? We sold oil search shares we originally bought for around $1-$2 per share and in the end sold them for $8.55. a total share value of $1.7b to buy into the LNG Project which is now worth just under $5b providing 20/30 years of income stream to the country. The establishment of a sovereign wealth fund and better future for the country, not to mention investor confidence setting an important platform for future Gas Projects.
In relation to the UBS loan its a bad investment for a number of reasons. Firstly all we bought was shares in Oil Search at a small discount price at $8.20 per share or $1.1b. Where the return on investment will be restricted to dividend payments dictated by Oil Search. Dividend of $0.04 per share or around 2% annual return.
Unlike in the IPIC deal where PNG originally bought the shares for less than $2 and then sold for $8.55 per share or $1.7b in total. We then took the proceeds of the sale and invested it into PNG LNG Project were our direct investment in the deal tripled from $1.7b to $5b plus direct 30 year earnings from the Gas Sales still to come.
In the UBS loan we paid Oil Search $1.1b which will never provide the same returns and exposes us to a large debt. A debt that will be repaid back from future earning from the PNG LNG gas sales hijacking funds that were suppose to be parked in Sovereign Wealth Fund. Therefore we should have just bought directly into the Gulf LNG project with significant returns and not given the money to Oil Search to do it and only receive a $0.04 dividend
In the end all the parties involved in this deal, PAC LNG who sold their shares in Inter-Oil to Oil Search, Oil Search itself, the bankers UBS who brokered the deal and those who alleged to have got kick backs all benefited considerably. The loser in this deal being the people of PNG. We all got suckered big time.
I hope this simple explanation better explains everything and please feel free to correct any misreporting of the facts if any.
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