While Oil Search's proposed $3 billion takeover of InterOil tidies up the Papua LNG joint venture and opens a path to accelerate development, RBC also warned there was still potential country risk in PNG with ongoing protests and a general election just 18 months away.
"There is a risk that some landowners and political opponents (will) generate noise which may negatively impact perceptions of PNG risk," RBC said in a client note on the merger yesterday.
The takeover deal involves Oil Search buying InterOil and then selling-on additional interests in PRL 15 and InterOil's other exploration licences to partner Total.
Oil Search will then own 29% of PLNG while the operator Total will have a 48.1% share - after the government backs in for around 22% at final investment decision.
The other key risk RBC named was the potential upside and downside from appraising the Elk/Antelope and P'nyang resources; the fact that the Aussie mid-cap is highly levereaged to oil and the Australian dollar due to the high percentage of its oil-linked LNG sales.
"While we forecast a recovering oil price, the recovery trajectory will likely be volatile, which will in turn impact Oil Search's share price," RBC said.
While appraisal wells are inherently lower risk than exploration wells, the bank said spectrum of resource outcomes from the drilling programs will still hit Oil Search's share price.
"We view this risk as asymmetrically negative as we currently factor in a 7Tcf resource for Papua LNG versus an appraisal range of 5-7Tcf," RBC said.
Oil Search argues that InterOIl's exit from the PRL15 JV significantly enhances the prospects for potential value enhancing collaboration with the ExxonMobil-operated PNG LNG, with the possibility of shared infrastructure, among other benefits, avoiding the duplication faced by three LNG plants in Queensland.
It also removes a roadblock to the partners progressing the project due to InterOil's limited funding capacity.
RBC said that on a like-for-like basis, post government back-in, Oil Search has increased its equity interest to 29% from 17.7% previously.
"We think it is by design that Oil Search's Papua LNG interest is now equivalent to its 29% interest in PNG LNG," RBC said.
RBC also conceded that InterOil's presence in the PRL15 JV may have been a "possible complicating factor" in striking a deal with PNG LNG over some form of collaboration.
"We are, however, mindful that ultimately PNG LNG and Papua LNG operators ExxonMobil and Total need to be committed rather than just Oil Search and the PNG government [as the only two common parties across both JVs]," RBC said.
"While sharing infrastructure may be rational in a net present value sense, the LNG industry has not had a great track record of rationality when it comes to collaboration.
"We view collaboration between PNG LNG and Papua LNG as potential value enhancement that we are not yet prepared to incorporate into our base valuation case.
"For Papua LNG we model a 7Tcfe gross resource, a 2x train [approximate] 7MMtpa development for capex of [about] $US13 billion."
