Santos is set to acquire a 13.5 per cent interest, subject to agreement, in the P’nyang natural gas field in Papua New Guinea. Analysts are generally bullish on the move, saying the company now has a strong balance sheet and is set to meet its production targets.

The LNG tanker ‘Papua’ loading at the PNG LNG project’s marine terminal. Credit: ExxonMobil/Richard Dellman

Santos is set to pay US$187 million (K630 million) in total, with approximately US$120 million (K404 million) payable following the execution of a fully-termed sale and purchase agreement expected around the end of June 2019. The remainder is to be in contingent instalments.

According to Santos, ExxonMobil will sell 12.3 per cent, Oil Search 1.65 per cent and Merlin Petroleum Company (a JX Nippon affiliate) will sell 0.54 per cent.

P’nyang is located 130 kilometres northwest of Hides, the main PNG LNG field in the Highlands. The proposal is to share infrastructure with the PNG LNG project, specifically a third train (T3).

Santos Managing Director and Chief Executive Officer, Kevin Gallagher, said Santos’ strategy in PNG is to work with its partners (ExxonMobil, Oil Search, JX Nippon) to align interests, and support and participate in backfill and expansion opportunities at PNG LNG.

‘We look forward to working with the PNG government, our partners and landowners to make expansion at PNG LNG a reality,’ he said.

Balance sheet

Shareholdings in the PNG LNG P’nyang project. Source: Bank of Canada

David Lennox, Resource Analyst for wealth management firm Fat Prophets, says Santos has ‘turned itself around.’

‘They had that capital issue and had to get their balance sheet into order. Strong energy prices have helped along the way with a good production profile,’ he says to Business Advantage PNG.

‘We think the company now is quite comfortable with its structure and it has been looking for growth.

‘Santos bought Quadrant not that long ago for US$1.93 billion (K6.5 billion) and is continuing to expand its ground exposure.’

Lennox says the Santos acquisition indicates the company is looking to diversify geographically.

‘We believe Santos was in a relatively strong negotiating position given its ownership of some of the existing PNG LNG project.’

‘The old adage is that you shouldn’t have all your eggs in one basket.

‘We certainly think the company is probably focusing more on natural gas rather than oil—although if a good oil field comes along I suspect they will look at it.

‘They are very keen to get into that long contract delivery with LNG, even with the US coming on stream in the next few years with potential LNG.

‘It is still a little quicker to go from (Australia and PNG) to Asia than it is from the US to Asia.’

Production

According to a report from the Royal Bank of Canada, the acquisition will help the company achieve its targets.

‘We think the progression on PNG LNG T3 (train 3) is but another example of the flexibility and prominence of growth options that Santos has at its disposal to help achieve its stated production goal of 100 million barrels by 2025,’ the report said.

A Macquarie Research report said Santos’ entry into P’nyang ‘has been well flagged’.

The report said it is happening at a ‘slightly better entry price than we had expected’, adding that the deal ‘paves the way’ for finalisation of the Gas Agreement with the Government by mid-2019.

‘We believe the completion of the agreement shows confidence of progressing the project over the coming months, with an expectation for a Final Investment Decision (FID) remaining for late-2020, and first gas in 2024.’

A Morgan Stanley report agreed that it was an attractive acquisition price for Santos.

‘It reflects the fact that P’nyang is a resource position located in a frontier region that will be expensive to develop.

‘We believe Santos was in a relatively strong negotiating position given its ownership of some of the existing PNG LNG project.’

Lennox says Santos’ debt at the end of December 2018 was $A3.5 billion (K8.16 billion).

‘They saw a significant uplift in free cash flow,’ he says.