Santos: Makes another solid acquisition

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
15 October 2019, 3:13 PM
Sectors Covered:
Mining, Energy

  • Santos (ASX:STO) has announced it is acquiring ConocoPhillip's northern Australian business.
  • The deal includes Conoco's interests in Darwin LNG, Bayu-Undan and the Barossa field, for total consideration of US$1.47bn (US$1.39bn on completion plus US$75m contingent payment when Barossa reaches FID).
  • STO is paying a reasonable US$2.71/boe per barrel of reserve/resource (2P + 2C), slightly below our in situ multiple for comparable offshore of US$3.00/boe.
  • We like the move, improving earnings and simplifying STO's growth plans in northern Australia (which may expand depending on exploration results).
  • We do not view the acquisition as significantly impacting STO's corporate appeal and we maintain our Add rating, with an increased price target (Morgans clients can login to view detailed reports and price targets)

Acquisition overview

Santos (ASX:STO) has announced a sizeable acquisition of ConocoPhillips’ northern Australia business (picking up operatorship and increasing equity interests in Darwin LNG, Bayu-Undan, Barossa field and the Poseidon field).

STO will pay US$1.39bn upfront, with a contingent payment of US$75m when Barossa reaches FID (final investment decision), planned for early 2020.

The transaction will leave STO with interests of 68.4% in both Darwin LNG and Bayu-Undan, and 62.5% in Barossa. STO also plans to sell a 25% interest in Darwin LNG and Bayu-Undan to Barossa JV partner SK E&S, with a Letter of Intent received.

Combined with the cash flow generated from these assets (to its 1 January 2020 effective date), which will be deducted from the purchase price, STO expects the remaining acquisition cost to be US$775-$825m.

This will primarily be funded from a new debt facility. The planned sell down to SK E&S would then be part of STO’s stated intention to reduce its equity interest to 40-50% in these assets, aligning the JV’s and reducing capex.

Rationale makes sense

We see a number of positives for STO from this transaction, helping to support the rationale.

For STO, the acquisition will:

  1. boost earnings (STO guided to ~19% EBITDAX accretive in 2020)
  2. improve the quality of its group earnings, and 3) simplify the path to development for STO’s northern assets

Meanwhile the rationale for ConocoPhillips selling its interests is also easy to understand, given how insignificant these interests are in its global asset portfolio.

Metrics stack up

A core positive for STO is the value upside this purchase delivers.

That sounds vague, but simply put, STO is creating value by acquiring 540mmboe (+19%) of high-margin brownfield barrels (2P & 2C) for ~US$2.7/boe (~11% below our in situ multiple for similar assets).

While there is some risk in the global LNG market outlook (sustained supply growth), it is difficult to see the offshore development not delivering further upside for STO.

Maintain Add rating

The improvement in STO’s valuation (Morgans clients can login to view detailed reports and price targets) has already been largely offset by the market re-rating STO’s share price on the news.

This has been a consistent issue with STO, with the company having transformed its business – but much of this value rapidly being priced in by the market.

Regardless, we still see incremental upside on offer as STO pursues its portfolio of growth projects (Darwin LNG, PNG LNG T3, Dorado).

We maintain our Add rating. The key risk to our call is the oil price.

More information

To view further analysis, Morgans clients can view the full research note. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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