Santos targets LNG growth with $1.4 billion ConocoPhillips deal

SYDNEY (Bloomberg) - Santos Ltd. agreed to buy ConocoPhillips’ northern Australia business for $1.4 billion in a deal that will boost the Adelaide-based oil and gas producer’s position in the growing Asian liquefied natural gas market.

The transaction may allow Santos to become the country’s largest independent energy producer and capitalize on a push by Asian consumers, including China, to switch to cleaner burning natural gas away from coal. Conoco is selling its operating interests in the Darwin LNG processing plant and the Bayu-Undan, Barossa and Poseidon gas fields.

“The acquisition of these assets fully aligns with Santos’ growth strategy to build on existing infrastructure positions, while advancing our aim to be a leading regional LNG supplier,” Santos Chief Executive Officer Kevin Gallagher said in a statement.

Santos has been expanding its position in the Australian oil and gas market having acquired Quadrant Energy for about $2.15 billion in 2018. Its latest deal could help it become Australia’s top independent energy producer: Santos and Conoco’s northern Australia assets produced about 94 million barrels of oil equivalent last year, compared to Woodside Petroleum Ltd.’s 91.4 million.

Sanford C. Bernstein & Co. analysts said Conoco’s northern Australia business has a net asset value of about $1.8 billion, citing Rystad Energy AS. The deal has “compelling strategic merit,” RBC energy analyst Ben Wilson said in a note to clients, adding that the price looked reasonable based on RBC’s valuation of the assets at around $1.63 billion.

Santos, which posted its biggest share gain this year, said it would fund the acquisition from existing cash and $750 million in new two-year debt. Conoco will receive a further $75 million once Barossa enters final investment decision.

Conoco is the second U.S. energy major to announce plans to sell down its interests in Australia after Exxon Mobil Corp. in September said it would start a process to find a buyer for its Bass Strait producing assets off the coast of southeast Australia. Conoco completed the sale of its stake in the Greater Sunrise field to Timor-Leste’s government for $350 million earlier this year, and the Santos deal will free up capital to invest in U.S. shale and return cash to shareholders, two of its priorities in recent years.

Conoco is also operator of the Australia Pacific LNG export facility in Queensland, which is not part of the Santos deal.

Advanced Talks

Santos plans to sell 25% of Conoco’s interest in the Darwin LNG export plant to South Korean firm SK E&S as part of the agreement. The company is also in talks with the facility’s joint venture partners, which include Inpex Corp, Tokyo Gas Co. Ltd., Jera Co. and Italy’s Eni SpA, to sell equity in the Barossa field, which has been earmarked to back-fill the Darwin plant once Bayu-Undan reserves run dry around the end of 2022. Santos will target ownership stakes in both the assets of 40%-50%.

“What we’re seeking is alignment,” said Gallagher on a media call. “What we’re looking for is people to be balanced on both sides of the joint venture,” he added, referring to partners having stakes in both Darwin LNG and Barossa.

Gallagher said the company is in advanced discussions with LNG buyers for gas off-take from Barossa, including with an existing partner in Darwin LNG, and was looking to contract 60%-80% of gas volumes for the project prior to taking a FID, which is expected in early 2020.

Neck and Neck

As an upstream, brownfield project, Barossa was “low risk” compared to new greenfield LNG projects around the world, “and because of that it’s got a very competitive cost of supply,” said Gallagher. Its location close to Asian markets also meant that shipping costs were less than from other competing projects. “It’s got very robust economics, even in this soft market that we find ourselves in today.”

Santos has ambitious plans to grow DLNG capacity by up to 10 million tons per annum, compared to 3.7 mtpa currently. Over the longer term, the potentially huge onshore gas shale reserves in the Beetaloo and McArthur Basins could be processed through DLNG, Gallagher said.

Santos’s shares ended 5.7% higher in Sydney trading Monday, having risen as much as 7.7% at one point.

Following the SK sell-down, Santos’ holding in Darwin LNG is expected to be 43.4%, with SK at 25%, Inpex at 11.4%, Eni at 11%, Jera at 6.1% and Tokyo Gas at 3.1%. Santos will hold 62.5% in Barossa, with SK owning the remaining 37.5%.