Santos today announced the acquisition of ConocoPhillips’ northern Australia business with operating interests in Darwin LNG, Bayu-Undan, Barossa and Poseidon for US$1.39 billion plus a $75 million contingent payment subject to FID on Barossa.
- Acquisition of ConocoPhillips’ northern Australia business with operating interests in Darwin LNG, Bayu-Undan, Barossa and Poseidon for US$1.39 billion plus a
$75 million contingent payment subject to FID on Barossa
- Value accretive acquisition of operating interests in long-life, low cost natural gas assets and strategic LNG infrastructure consistent with Santos’ core asset growth strategy
- Fully funded from existing cash resources and new committed debt
- Materially accretive: ~16% expected earnings per share accretion and ~19% EBITDAX accretion in 20201
- Increases pro-forma production by ~25%, pro-forma 2P reserves by ~5% and pro-forma 2C contingent resources by ~27%2
- Reduces forecast 2020 free cash flow breakeven oil price by ~US$4 per barrel
- Targeting pre-tax synergies of US$50-75 million per annum (excluding integration and other one-off costs) driven by Santos operatorship and efficiencies
- Acquisition delivers operatorship and control of strategic LNG infrastructure with growth potential
- Acquisition advances and supports Santos’ goal of taking Barossa FID by early 2020. Santos is prepared to sell down equity in Barossa and Darwin LNG to a target ownership of 40-50% to achieve increased partner alignment
- Barossa partner SK E&S is highly supportive and has signed a Letter of Intent to acquire a 25% interest in Bayu-Undan and Darwin LNG
- Santos is also in discussions with existing Darwin LNG joint-venture partners for equity in Barossa and in advanced discussions with LNG buyers for Barossa offtake volumes, including with an existing partner in Darwin LNG
Santos Managing Director and Chief Executive Officer Kevin Gallagher said Santos has enjoyed a long-established relationship with ConocoPhillips which has operated its northern Australia natural gas assets for many years.
“Santos was a founding partner with ConocoPhillips in Darwin LNG, which has been operating since 2006. 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,” Mr Gallagher said.
“This acquisition delivers operatorship and control of strategic LNG infrastructure at Darwin, with approvals in place supporting expansion to 10 mtpa, and the low cost, long life Barossa gas project.
“These assets are well known to Santos. It also continues to strengthen our offshore operating and development expertise and capabilities to drive growth in offshore northern and Western Australia.”
“Santos is also committed to be Australia’s leading domestic gas supplier and we will be pursuing domestic gas opportunities in the Northern Territory from our broader northern Australia gas portfolio where we have significant resource potential both onshore and offshore.”
“Santos intends to manage gearing within our stated operating range and is targeting to sell-down equity in Darwin LNG and Barossa to 40-50% in order to create alignment between joint venture participants as well as by optimising equity levels in our Western Australia assets.”
“We are also in discussions with existing Darwin LNG joint-venture partners to sell equity in Barossa and further equity in Darwin LNG and also with LNG buyers for offtake volumes. Santos will target the contracting of ~60-80% of LNG volumes for 10+ years prior to taking FID on Barossa, which is expected by early 2020. Discussions to date have demonstrated strong interest in Barossa LNG, given it is a brownfield upstream development located close to North Asian demand.”
“The acquisition is value accretive for Santos shareholders in year one following completion across a range of metrics and importantly further reduces our free cash flow breakeven oil price by approximately US$4 per barrel in 2020.”
“As we have demonstrated following the acquisition and integration of Quadrant Energy into our offshore business, Santos’ low-cost operating model is creating opportunities for disciplined growth across Australia.”
“We look forward to welcoming ConocoPhillips’ Australia-West employees to Santos and combining the two businesses to create one high performing team with a wide range of exciting career opportunities across Santos,” Mr Gallagher said.
1 Expected pro-forma accretion in 2020 assuming US$65 per barrel oil price and full-year of ownership. Assumes Santos interest of 68.4% in Bayu-Undan/Darwin LNG and 62.5% in Barossa (i.e. pre sell-down to SK E&S).
2 2018 pro-forma based on Santos’ 2018 production and reserves and resources. Production adjusted for a full-year of Quadrant ownership. Assumes Santos interest of 68.4% in Bayu-Undan / Darwin LNG and 62.5% in Barossa (i.e. pre sell-down to SK E&S).
ConocoPhillips Northern Australia Portfolio Overview
ConocoPhillips holds a high-quality portfolio of operated production, development and exploration assets in northern Australia. It also operates and is the majority owner of the Darwin LNG facility, which has a capacity of 3.7 million tonnes per annum of LNG and significant expansion potential.
|3.7 mtpa LNG capacity||600 mmscf/d gas production capacity||799 mmboe gross
Tokyo Gas 3.1%
Tokyo Gas 3.1%
SK E&S 37.5%
1 Santos net 62.5% interest post-completion is 499 mmboe net 2C resource.
The Barossa project is the lead candidate to backfill Darwin LNG and continues to make excellent progress towards a final investment decision early next year. Barossa is intended to be developed using subsea wells tied back to an FPSO for gas processing and condensate export. A 260-kilometre gas export pipeline will transport gas to the existing Bayu-Undan pipeline for onwards transport to Darwin LNG.
Recent project milestones include the award of the subsea production system contract, the award of the gas export pipeline contract and entering into exclusive negotiations with Darwin LNG for the supply of backfill gas. Evaluation of tenders for the FPSO, subsea umbilicals and flowlines and drilling rig packages are progressing well.
Santos currently expects a final investment decision on Barossa by early 2020, with first LNG expected in 2024. Barossa development capex is currently expected to be approximately US$4.7 billion (2019 real) to first gas.
Barossa is expected to extend the operating life of Darwin LNG by more than 20 years. Life extension capex at Darwin LNG of approximately US$600 million (2019 real) is expected to be incurred between Bayu-Undan end of field life and the commencement of production at Barossa.
The acquisition of ConocoPhillips’ northern Australia portfolio is fully aligned with Santos’ growth strategy to build on existing infrastructure positions around the company’s core assets.
The acquisition delivers operated interests in long-life low cost gas assets including Darwin LNG, Bayu-Undan, Barossa and Poseidon. It also brings operatorship of a strategically located LNG hub with significant expansion potential and longer-term opportunities to monetise Santos’ material resources in the region.
The acquisition also continues to strengthen Santos’ offshore operating and development expertise and capabilities to drive growth in offshore northern and Western Australia.
The acquisition is financially compelling and value accretive for shareholders across a range of short and long-term financial metrics. Santos is targeting material synergies of
US$50-75 million per annum (pre-tax) from the acquisition.
Santos will acquire ConocoPhillips’ interests in northern Australia for total consideration of US$1.465 billion, comprising a US$1.39 billion upfront payment at completion and a
US$75 million contingent payment once a final investment decision on Barossa is made. ConocoPhillips will continue to support the FID process for Barossa.
The acquisition will have an effective date of 1 January 2019. Santos will have the benefit of cash flows generated by the acquired business from the effective date with customary adjustments.
Completion is subject to third-party consents and regulatory approvals.
SK E&S support
SK E&S is a major participant in Barossa with a 37.5% stake. SK E&S is highly supportive of the transaction and Santos becoming operator.
Santos and SK E&S have signed a Letter of Intent for SK E&S to acquire a 25% interest in Bayu-Undan and Darwin LNG, which would further align Santos and SK E&S toward the development of Barossa, a key priority for both companies.
The net funding requirement for the acquisition is expected to be approximately US$775-825 million, post the benefit of cash flows generated from the acquired business from the effective date of 1 January 2019 to completion with customary adjustments and proceeds realised from the expected sell-down to SK E&S.
The net funding requirement will be fully funded from Santos’ current cash resources and US$750 million in new committed two-year acquisition debt. It is intended that the acquisition debt will be refinanced post-completion of the acquisition.
Santos had US$1.2 billion in cash on hand as at 30 June 2019.
In-line with its long-standing strategy, Santos intends to maintain a strong financial profile consistent with an investment grade credit rating. Net gearing is expected to decline to ~30% by the end of 2020. De-gearing will be supported by Santos’ strong free cash flow profile and through potential sell-downs in Barossa and Darwin LNG. Santos also expects to maintain available liquidity in excess of US$2 billion.
Santos also has flexibility to reduce gearing further by optimising its broader asset portfolio through strategically-aligned farm-outs and disposals.