Santos Dismisses PNG Risks in Proposed Merger

Australia's Santos dismissed concerns that its proposed merger with Oil Search would lead to increased concentration of its operations in Papua New Guinea (PNG) and elevate the country risk posed by the underdeveloped economy. Santos CFO Anthony Neilson told analysts in an earnings call Tuesday that the firm is comfortable with PNG’s country risk score and it has been engaging banks before the merger announcement and during due diligence. “They are very comfortable with the exposure to PNG post the merger, as it will be part of a far bigger portfolio," Neilson said. The Merger The merger, if it goes ahead, would create an Asian LNG powerhouse by combining Oil Search's LNG assets in PNG and Santos' assets in Darwin LNG and Gladstone LNG in Australia. In PNG, Santos’ stake in Exxon Mobil’s existing 6.9 million ton per year PNG LNG project would be hoisted from 13.5% to 42.5% while assuming Oil Search’s 17.7% stake in TotalEnergies’ yet-to-be-sanctioned 5.6 million ton/yr Papua LNG project (LNGI Aug.2'21). Santos CEO Kevin Gallagher again raised the prospect selling down the merged company’s enlarged 42.5% stake in PNG LNG, which “gives us the opportunity to optimize and align all the partners across LNG projects in PNG.” He declined to be drawn on how much equity it would likely sell down. Analysts expect Santos to sell down 10%-15%, which would reduce its stake behind Exxon’s 33.2%. Due diligence on the merger and a merger implementation deed are expected to be completed in early September. Oil Search shareholders are due to take a vote by late November, after which approval would be sought from the PNG National Court. PNG Risk “A diversified portfolio does not get restricted by PNG. We are confident that this would not be a problem,” Gallagher said. Rating agency Standard & Poor’s said last week that the merged company would derive more than 40% of its earnings from PNG, which has a “very high” country risk, and warned this could put Santos’ credit rating, which is currently at BBB-, at risk. Addressing concerns over the PNG government’s position on the merger, Gallagher points out recent comments made by PNG's Prime Minister James Marape on the merger being subject to a national interest test is a criterion common in other jurisdictions (LNGI Aug.5'21). “PNG sees the value and logic of the merger,” he said. Midstream Sale Santos wants to create value from its midstream infrastructure portfolio that would generate stable and material revenue. One of the possibilities is selling its 30% stake in Gladstone LNG’s (GLNG) infrastructure assets, following the footsteps of its partner TotalEnergies’ recent US$750 million deal with Global Infrastructure Partners Australia (GIP Australia) (LNGI Jul.13'21). As part of the deal, GIP would receive a throughput-based tolling fee based on Total's share of gas processed through the facilities. “The deal shows there is appetite out there and it would give us another source of capital,” Gallagher said. Santos expects its 30% stake would be valued at US$820 million with Ebitda of $95 million annually. Carbon Capture Santos reiterated it is on track to sanction the 1.7 million ton/yr Moomba carbon capture storage (CCS) project in the second half of this year. It expects to receive approval for the project's eligibility for Australian carbon credit units in the fourth quarter. First CO2 injection is planned to happen as early as 2024. According to Gallagher, Santos is also assessing the feasibility of creating a CCS hub at Bayu-Undan with the capacity of approximately 10 million tons/yr of CO2 and providing a cost-effective solution for Barossa reservoir emissions. Barossa was sanctioned earlier this year and will backfill Santos’ Darwin LNG plant (LNGI Mar.30'21). Clara Tan, Singapore Santos' First-Half Earnings (US$ million) 2021 2020 %Chg. Total Revenue 2,020 1,668 21% Ebitda 1,231 995 24 Net Profit 354 -289 NA Production Volume ('000 boe/d) 261 213 23% Source: Santos