Ladies and gentlemen, thank you for standing by, and welcome to the Santos conference call. At this time, all participants on a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I now hand the conference over to you for our speaker today, Managing Director and CEO, Mr. Kevin Gallagher. Thank you. Please go ahead.
Good morning, everyone, and welcome to the call. Joining me this morning is CFO Anthony Neilson. I'm delighted to announce this morning that Santos has signed an agreement to acquire ConocoPhillips business in northern Australia. Santos has enjoyed a long-established relationship with Conoco, which has operated our northern Australian natural gas assets for many years. Santos was a founding partner with Conoco in Darwin LNG, which has been operating since 2006. Conoco continues to do an excellent job running these assets and progressing the Barossa gas project towards FID early next year. Under the acquisition, Santos will increase its interest in and become operator of Darwin LNG, Bayu-Undan, and Barossa. These are long life, low cost natural gas assets which are well known to us. This is a value-accretive acquisition of strategic LNG infrastructure, with approvals in place for expansion up to 10 million tons per annum.
The acquisition is fully aligned with Santos's greenfield growth strategy of building on existing positions around our five core assets. Northern Australia has the potential to become a major LNG hub for the long term, supported by Santos's regional offshore gas resources of more than 10 TCF gross. Our onshore position in the McArthur Basin provides further multi-TCF resource potential. The acquisition also unlocks opportunities to create value through strategic partnerships to bring discovered resources to market, leveraging Santos's strong operating capabilities. The acquisition is value accretive for Santos shareholders in year one across a range of metrics. We expect 19% EBITDA accretion and 16% earnings per share accretion in 2020. It also provides a significant boost to our reserves and 2C resources, and it reduces our 2020 forecast free cash flow break-even by $4 per barrel.
We are targeting pre-tax synergies of between $50 million-$75 million per annum, excluding integration and one-off costs. We will utilize our experience from the acquisition and successful integration of Quadrant into our business to drive these synergies. I'm very pleased with the progress that we are making towards Barossa FID. Barossa is expected to extend the operating life of Darwin LNG by more than 20 years. Barossa's greenfield nature and proximity to key Asian markets is attractive to buyers and has been well received in the market. Barossa is among the lower cost of supply options for new global LNG supply and provides robust economics in the current LNG term contracting environment. Prior to taking FID on Barossa, we are targeting to contract between 50%-80% of LNG volumes for 10 years.
Santos is prepared to sell down its interest in Darwin LNG and Barossa to between 40% and 50% to increase partner alignment and is in discussions with existing joint venture participants. SK, our partner in Barossa, has signed a letter of intent to acquire a 25% interest in Bayu-Undan and Darwin LNG. This will further align Santos and SK towards the development of Barossa, which is a key priority for both companies. The acquisition of Conoco's assets is fully funded from existing cash resources and new committed debt. Importantly, Santos has the benefit of cash flows generated from the acquired business from the effective date of the first January 2019 completion. When this cash is combined with proceeds from the expected sell down to SK, net Santos cash funding requirement after completion and sell down is reduced to between $775 million and $825 million.
To put this in perspective, this is less than Santos's free cash flow in the first nine months of this year. This strong free cash flow generation supports rapid de-gearing, as we have demonstrated following the acquisition of Quadrant last year. Gearing at completion is expected to be around 35% before the sell down to SK and may decline to approximately 30% by the end of 2020. De-leveraging is supported by Santos's strong free cash flow profile and proceeds from potential sell down transactions. In addition, we have the flexibility to optimize the broader Santos asset portfolio through strategically aligned farm-outs and disposals. As I have consistently said, our gearing target in normal operating conditions is between 20% and 30%.
This is what we refer to as the green zone. We will go up to 35% from region growth and/or M&A activities that we're announcing today, with rapid de-gearing afterwards, just like we have done following the Quadrant acquisition last year. In summary, I am delighted to announce today's acquisition. It's fully aligned with our strategy, value accretive to Santos shareholders, fully funded, and continues to strengthen our operating and development capability and capacity. I look forward to welcoming ConocoPhillips Australia-West employees to Santos and combining our two businesses. We're now happy to take your questions.
Thank you. Ladies and gentlemen, we're now beginning the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound hashtag key. Once again, ladies and gentlemen, please star one and wait for your name to be announced. Thank you. We have no further questions in queue. Our first question is from James Redfern from Bank of America Merrill Lynch. Please ask your question.
Yeah. Hi, Kevin. Hi, well done on another great transaction.
Sorry about that. We released James Redfern. Lines keep us static. We'll take the next question now from Adam Martin from Morgan Stanley. Please ask your question.
Good morning, Kevin. This year's been a record year for Santos's globally. I think it's been about 60 million tons across the globe. How defensive do you think this project is from a LNG breakeven cost? You sort of alluded that it's towards the bottom, can you give me numbers or can you provide some context there, please?
Look, Adam, not today. We will give you some more guidance towards the end of the year, perhaps at our investor day in a couple of months' time. What we can say about Barossa, it's an offshore upstream brownfield project. As we've said repeatedly, it's at the lower end of the cost curve in terms of cost to supply. It's a very competitive project in the global LNG environment, and it's got good liquids that come with it, which makes it more robust. What I can tell you is, even in the current environment, it's a very robust project.
Okay. Just on Conoco's reasons to sell. Is there any sort of anything you can provide there on your thoughts, why they want to sell? There are obviously other assets in Australia still, can you provide any context there?
Well, look, I think that question is for ConocoPhillips. I think it's been well speculated over a long time. It's really a question for them. Other than saying, I think it's just part of their overall strategy.
Okay. Just final question. CO2 removal, I know the price has been quite high in CO2. Can you talk about that, the plan for that and what the steps are?
Look, Santos have made their longer-term aspirations for CO2 levels and emissions reduction very public, we're working a number of things there across the business to do that, in particular, the CCS projects across the Cooper Basin. I think you'll see a lot more of that over the course of the next year. We are developing what we believe are very robust and sound strategies for CO2 mitigation and for emissions reductions as we go forward. We'll reveal more details of that as we develop them and as we get the results of our tests in the Cooper Basin.
Okay. Thanks. That's all from me. It looks like a good deal. Thank you.
Thank you.
Once again, ladies and gentlemen, to ask a question it is star one. Our next question is from Mark Samter from MST. Please ask your question, Mark.
Yeah. Morning, guys. Couple of questions for Kevin. First one, just when we think about the growth strategically and maybe around the fact that you mentioned selling down some equities to SK E&S now, is there the scope to sell to parties outside of the JV? I guess two things we think about expansion capacity, maybe talk through your position as operator there. Personally, if I was in the Beetaloo and see someone in the Beetaloo, this is a project you acquired today. How that all works around the other two projects?
Well, look, I lost the last part of that, Mark, I think I got the gist of your question. Thanks for that. Look, I think first of all, our focus is on working with all the partners in Darwin LNG and in Barossa and helping get a much stronger line up of partners across those two projects. We've had very encouraging early conversations with many of the partners. That's our focus for Barossa. We're looking forward to taking FID early in the new year on that. In terms of the bigger strategic play, the rationale is sound and we're open for business. We are very definitely looking at all resource owners in the region. We want to make the pie bigger and it doesn't have to be just Darwin LNG partners.
If there's other resources out there, then we want to look at how we can bring them through Darwin and expand Darwin. As I said in my speech earlier, that Conoco already have approval for two other trains at Darwin. The sites are laid out. That approval takes us full capacity up to a potential 10 million tons per annum. There's a lot of capacity there. As you rightly point out, there's a lot of resources in the region. We will be looking to work with other resource owners in the region to build a brick, if you like, for potential upstream resources to fill those trains. That very much beyond 2025. Our focus in the short to medium term is on delivering Barossa.
And then just a
Yeah.
dream market expansion along the 50th or along the way down. We think about the structure of the JV with future trains. How does the ownership structure work? Are we looking to bring other people into the future trains?
Well, look, it's very early doors to be talking about what that might be like. What I can say, it's perfectly feasible that you can have different ownership structures on all three trains in Darwin, once they were constructed. Certainly that's what I would expect would happen over time. Basically, you'd have different upstream joint ventures, potentially having their own trains.
All right. I might just ask a slightly forward question to Anthony. Sorry, I think it'd be just around the abandonment liabilities that you highlight, so that $1.1 billion. Can you give us just a bit of a feel on the timelines and expectations around that number?
Yeah. Thanks, Mark. Yeah, that is gross. The sell down obviously reduces our exposure to that number as well. We've already got 11% of that and a sell down to SK of 25%, then it only changes it by 35% more from Santos' net perspective. It is spent over a few years. We're expecting it end of field life to be around about 2032 type timeframe. Obviously we'd work with availability of services and regulators, to then work out what the right spending pattern is and timeframe. Also depends on what could be left in the future. It's possible that there'll be ability to lend the money over quite a few years.
Cool. Actually, just a quick third question. I'm just double-checking, but I presume the gearing numbers are based on the assumption of Dorado 80% at the moment, aren't they?
Yes.
Yeah. Cool. All right, guys. Thanks very much.
Yeah. Thank you.
Our next question is from Ben Wilson from Royal Bank of Canada. Please ask your question, Ben.
Good morning, Kevin and Anthony. Thanks for taking the question. I just want to unpick your outlook for the acquisition synergies, the AUD 50 million-AUD 75 million per annum that you've indicated. As you look to the various sell downs that you'll undertake on Darwin and also potentially Barossa, is that figure of 50-75 intended to be sustained by Santos effectively from what we'd assume to be the life of the Barossa project into Darwin?
Well, Ben, thanks for the question. Look, the numbers we give you are what we are aiming to achieve on a sustainable basis, just as we communicated at Quadrant. Not one year or two year synergy savings, but very definitely sustainable savings that come from basically the combining of different businesses into one. Those, as I can just say, those aren't just people-related savings. There are many synergy benefits that come from shared project services, insurance on assets, things like that you get benefits from when you have a different ownership position. We found that very much to be the case in Western Australia, where as you know, we're at the far end of guidance on delivery of those synergy values.
Okay, thanks for that. It's just a bit of an unusual situation, reconsidering synergies as you're going from a very different equity structure under the prior potential development to one which will be much more aligned. I'm just trying to compare what would be pre and post, but I can talk about that later. Secondly, just a related question on your funding, I guess. Does this at all change your timing or intended equity sell down of what you're doing with Dorado?
No, it doesn't change anything. As Anthony's pointed out, the gearing ratio is very manageable. Within the operating model restrictions that we put on our business, it's completely compliant with that. Of course, once we sell down equity across these assets, we very quickly get back into what we would consider a normal operating gearing ratio levels. We'll be very focused on that over the next few months as we complete this deal. A lot of headroom. We're very confident, even as we move into project execution mode over the course of the next four to five years, our gearing ratio will stay within those levels that we've communicated consistently.
Okay, that's great. Thanks very much.
Thank you, Ben.
Our next telephone question is from Daniel Butcher from CLSA. You can ask your question there, Daniel.
Hi, everyone. Yeah. Of the questions that have been asked already, I was curious, with your gearing during the CapEx phase of 25%-30% after sell down, I'm guessing that doesn't include PNG Train 3 and Dorado funding. I'm just curious what gearing would increase to if you included the FID on those two projects?
Well, actually, why don't you take them to the capital management?
Daniel, how are you? Yeah, look, slide 20 in the back includes the budgets for PNG LNG, Barossa backfill, Dorado, and assuming sell-down interests in Barossa as well. The range of 25%-30%, we have sort of factored in all of that growth projects that we have in the period from 2021 to 2024, plus the sell-down to get to a target equity in Barossa project of about 40%-50%.
Okay, very clear. Thanks. I just noticed that in the discussion about offtake, you're going speaking to one of the current partners in DLNG. I'm just curious if the other two or three are in the count as well from offtake, or are they less interested?
Look, I mean, the conversations we're having with buyers are confidential, and we couldn't comment on that. What I can tell you is that because of the brownfield nature and the low-risk nature of this project, the location of Darwin, and the history of Darwin, the LNG volumes that we're marketing are being very welcomed in the market. There's a lot of appetite for them. As I say, we're talking to a shortlisted few buyers in very advanced discussions.
Sure. Just one follow-up, just to follow up on Adam's question about CO2. I know she sort of focused on what you're doing in Cooper in your response. I take it from that there's no specific gas reinjection of CO2 or anything else planned for Barossa that may have been integrated with it, with the 22% of CO2.
No, look, we wouldn't be looking to do that offshore. What I can say, Dan, is that we've got a technical services agreement in place with Occidental, who are widely recognized as the global leaders in CCS technology and carbon capture type of technology. We are testing the CCS projects out in Cooper Basin. We believe that that gives us a real opportunity to develop a carbon strategy that will put us at the forefront of the industry and in terms of low-cost carbon capture and mitigate and offset our emissions elsewhere.
Very clear. Thanks. Sorry, just for the [audio distortion] CapEx, I think it's only what, eight or 12 wells that you have to chop off. I'm just wondering, the vast majority of that would be the platforms removal would it? I'm just curious how much of that would be actually deferred if you left them in situ and so forth.
Yeah, well, look, I mean, as Anthony said earlier, all of that's got to be agreed, and it will be agreed at a later date. I mean, basically, you've got your wells. There's a little bit of pipeline activity. Obviously, the first thing we would need to get ready for Barossa would be to disconnect the pipeline so that we could tie into the pipeline for the Barossa project. Yeah, I mean, your wells P&A, that's a key from an environmental perspective, doing that properly. The rest is actually pretty straightforward, and we will work hard at that, and we'll look at what can be left and see what can't. We're very confident we can deliver the scope significantly less than the provisions that we're carrying at this point in time. That work is still likely to be developed.
Okay. All right. Thanks very much. That's great.
Thank you, Dan.
Our next follow-up question is from James Redfern from Bank of America. Please ask your question.
Yeah. Hi, Kevin. Can you hear me okay?
There's a lot of crackle there, James. Let's give it a go.
Sorry about that. I'm not sure what's going on. Well done on the great transaction. I just want to ask about the letter of intent with SK for the 25% interest in Darwin LNG. Should we assume that's on equivalent terms to this transaction in terms of pricing? Just want to confirm that you're also looking to sell down in Barossa as well, which we should expect to be completed next year. Thank you.
Okay. Thanks for that, James. I mean, I think the terms of the LOI are confidential until it's completed. Basically, once that's completed and we've signed the SPA, we can then give you the details of that agreement. I think your premise is a fair one to go on, that it's on equivalent terms. I mean, I think it's okay to say that. As Anthony alluded to earlier on, and as I said earlier in my speech, the discussions have already started with the DLNG joint venture partners, and Santos is prepared to sell down equity in Barossa to seek alignment. We are seeking alignment. We want to help all the partners here in Northern Australia get around the Barossa project and to make it happen and be supportive of that.
We'll do what we need to do to get that alignment, I guess is what I'm saying.
The next follow-up question is from Paul Phillips from UniSuper. Please ask your question, Paul.
Hi, guys. Well done on the deal. A few sort of mechanical questions, if you like. In terms of the $775-$825, what is the anticipated completion date? Is it the 30th of June, like you're sort of saying in the numbers, or is it some later date?
We're estimating for that number at year-end. It'll be around year-end, maybe a little.
Okay. Good. The 25%-30% in expected gearing from 2021 to 2024, that's at $65 oil. What sort of Aussie dollar are we assuming?
In that, we're assuming AUD 0.75.
AUD 0.75. Okay. That's post the sell down to SK, but no sell down of Barossa, which would then have implications for CapEx and everything else as well.
Yes.
That's good. Yeah. Right. Perfect. Thanks, guys.
Thank you.
Our next telephone question is from Baden Moore from Goldman Sachs. Please ask your question, Baden.
Good morning, guys. I just have a question on the Poseidon asset. Can you talk to how you would think about value within that asset? Is there a capital cost to date spend on that asset so far?
Well, look, I think, first of all, in terms of the strategic opportunity there, we see that sitting right next to our Crown and Lasseter resources in that northern Browse area, which combined, I think gives us a resource of over five Tcf of gas in that region. How we would monetize that, too soon to say. Obviously, we'll look at that going forward. Anthony, do you want to talk about the value?
Yeah, look, we're obviously not putting a lot of value on it. It's still a discovered resource. It's still got a lot of potential to go forward with that we need to evaluate over time. There are seven discoveries in that Poseidon area, and it's 500 meters of water depth, so there's no outstanding commitments, and there's been eight wells drilled in that area since 2009. It is a good discovery. It does have potential. There still needs a lot of work in that area on a bigger accumulation and consolidation.
As is the current roster asset. In isolation, they've just not been big enough to support any development. They've been stranded for a long time. Cumulatively, the potential is there, and that's something that when you look at that and look at a lot of the other stranded resources offshore in Darwin, we have Petrel, Tern and Frigate in the Bonaparte Basin, which is around 2.5 TCF as well. There's a lot of resource stranded, and that's before you look at the onshore opportunities. As I said earlier, Baden, the focus is very much here on delivering Barossa and bedding down the integration of the organizations in the west. How we develop or monetize these assets is really the picture beyond 2025.
Thanks, guys.
Okay. I think, operator, we've got time for one more question, I believe.
Not a problem. Our final question today is from Scott Ashton from SHA Energy. Please ask your question.
Good morning, Kevin and Anthony. Just a quick question. How does the PRRT Act mechanism work in all of this? What is Barossa going to sort of benefit from some of the PRRT Act credits that sit in Bayu-Undan? Because you've made a comment about it being quite robust given the liquid content, but I'm just trying to understand how that may integrate into the bigger development.
Well, it's a completely separate project. Why don't you just handle that one, Anthony?
No, you're right. Yeah. Thanks, Scott. Yeah, no, it's an awesome separate project, so no benefit between Bayu and Barossa.
Okay. Like I query, you don't have any transferability or anything like that?
We have offshore exploration transferability across our portfolio, which wouldn't allow it.
Yeah. Okay. That's great. Thanks.
Yeah. Thank you. I think that concludes our call. Thanks, everybody, for dialing in, and we'll look forward to catching up with some of you over the course of the next few days and beyond. Thank you.
Ladies and gentlemen, that does conclude our call for today. Thank you for all participating. You may all disconnect. Goodbye.