Oil Search to extend bilaterals

OIL SEARCH is looking at an extension of bilateral loans totalling US$300m by nine months and is raising a larger amount through equity to strengthen its balance sheet amid a marked decline in oil prices. 

The bilateral facilities will be extended to June 30 2021 from September 13 2020 and are subject to standard regulatory approvals and completion of the A$1.16bn (US$700m) equity funding.Following the extensions, the company will have no corporate loans maturing in the short term, according to its filing to the Australian Securities Exchange on Tuesday.As at December 31 2019, Oil Search had six corporate facilities totalling US$1.2bn, of which US$440m were drawn. 

A successful equity funding will raise Oil Search’s pro forma liquidity to US$1.835bn as at December 31 2019, including US$1.07bn cash, US$760m of undrawn debt facilities less a US$4m bank guarantee. Pro forma gearing will be at 28%.Preliminary discussions with lenders indicate a willingness to consider covenant waivers should they be required, according to the filing. 

Key financial covenants that are tested semi-annually include requirements for the Ebitda to net interest expense to be equal to or more than 3.0x and for book gearing, inclusive of finance lease, to be equal to or less than 55%.Oil Search is currently compliant with all financial covenants, the filing said.Based on current forecasts, prior to the completion of cost reduction initiatives currently underway, the company expects to comply with the first covenant at June 30 2020. 

However, Oil Search faces a risk of non-compliance of the covenant at December 31 2020 and June 30 2021 if the spot Brent crude oil price averages below low US$20s per barrel for 2020 and below low US$30s per barrel for the 12 months ending June 30 2021 respectively, according to the filing.Oil Search is also one of the sponsors for the Papua New Guinea LNG project, which has raised a US$2.939bn non-recourse financing that has no financial covenants and is secured against the project assets. 

A minimum cash balance equal to six months of forecast principal and interest payments is held in reserve within the PNG LNG project accounts at all times. 

The facility has escrow accounts with sufficient cash retained for almost all principal and interest payments due in 2020, without any additional cashflow from operations. 

Cash distributions from the PNG LNG project are only made to Oil Search each quarter once all cash obligations have been met or set aside and minimum historic and forward debt service coverage ratios are achieved.Oil Search has reduced forecast capital expenditure from April 1 2020 to US$200m–$300m from US$400m–$500m. 

The company had already announced a 40% reduction in 2020 forecast investment expenditure to US$440m–$530m from US$710m–$845m on March 18 in response to the fallout from Covid-19.In December 2018, Oil Search refinanced two bilateral revolving credit facilities totalling US$250m with three longer-tenor borrowings. 

Commonwealth Bank of Australia, Mizuho Bank and Sumitomo Mitsui Banking Corporation Sydney branch provided the new bilateral loans, each of which is for US$100m and carries a five-year tenor.