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    Santos Takes Over Conoco's Oz Assets

Summary

Santos is shoring up control over Darwin LNG and its resource base, while ConocoPhillips wants to redeploy capital to its North American operations.

by: Joseph Murphy

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Santos Takes Over Conoco's Oz Assets

US major ConocoPhillips has agreed to sell its entire Australian business except its share in a Queensland-based LNG project to local player Santos for $1.39bn.

ConocoPhillips is offloading its 56.9% position at the 3.24mn mt/yr Darwin LNG export terminal and the Bayu-Undan gas field that supplies it, the company said in a statement on October 14. It is also selling its 50% interest in the Athena gas field, in production since 2001.

In addition, the company is offloading its 37.5% share in the undeveloped Barossa and Caldita gas fields, considered a potential resource for an expansion at Darwin LNG, and a 40% stake in the Poseidon discovery. Together the assets produced 50,000 barrels of oil equivalent/day in the first half and hold 39mn boe in proven reserves.

“While we believe the Darwin LNG backfill project remains among the lower cost of supply options for new global LNG supply, this transaction allows us to allocate capital to other projects that we believe will generate the highest long-term value to ConocoPhillips,” the company’s executive vice president Matt Fox explained.

ConocoPhillips will keep hold of its 37.5% operating share of the Australia Pacific LNG project. Proceeds from the sale will go towards general corporate purposes, it said.

Santos, which already has a 25% position at the Barossa and Caldita fields, said the takeover of ConocoPhillips’ operating stake would help it move towards a final investment decision (FID) at Barossa by early 2020. It will pay an additional $75mn to the US major when this step is taken. The deal will also raise Santos' share in Darwin LNG to 68.4%.

“This acquisition delivers operatorship and control of strategic LNG infrastructure at Darwin, with approvals in place supporting expansion to 10mn mt/yr, and the low cost, long life Barossa gas project,” Santos CEO Kevin Gallagher said in a separate statement.

Santos noted that its South Korean partner at Barossa, SK E&S, had signed a letter of intent to acquire a 25% stake in Bayu-Undan and Darwin LNG. Santos is also in talks with existing Darwin LNG partners for the sale of equity at Barossa. Its target is to reduce its ownership of both Darwin LNG and Barossa to 40-50%. The company is also in discussions with LNG buyers for Barossa offtake volumes, including with one of Darwin LNG’s current investors.

Wood Mackenzie analyst David Low described the acquisition as “logical and attractive,” saying it would “act as a catalyst for further alignment of equity” across the Barossa, Bayu-Undan and Darwin LNG projects.

"The deal fits within Santos’s strategy of acquiring low-cost, Australasian natural gas assets,” Low said in a research note. “However, even though Barossa is attractive as a brownfield LNG backfill investment, it is also a large and complex project. With over US$4 billion of CAPEX spend to first gas, executing the development on time and on budget will be a major test of Santos's 'big project' credentials.”

Securing control of Darwin LNG’s infrastructure will also help Santos monetise other stranded Northern Territory gas assets including Petrel, Tern and Frigate, he said.

Low added that ConocoPhillips’ exit was no surprise.

“We now expect the US company to redeploy this capital into its North American unconventional and Alaskan positions. ConocoPhillips already allocates around 70% of its capital into its US operations, so this sale, following recent Timor Sunrise and UK divestments, is firmly in line with its strategy of reducing international exposure and increasing North American output,” he said.

Further merger and acquisition activity is expected in Australia, according to the analyst.