M&A Announcement

Oct 13, 2019

Press Release

Ladies and gentlemen, thank you for standing by, and welcome to the Form 12 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I now like to hand the conference over to your host for 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 Nielsen. 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 a Northern Australian natural gas assets for many years. And Santos is a founding partner with Conoco and Darwin LNG, which has been operating since 2006. Conoco continues to do an excellent job running these assets and progressing the Varossa gas project towards FID early next year. Under the acquisition, Santos will increase its interest in and become operator of Ballard LNG, Bayer London 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 10,000,000 tonnes per annum. The acquisition is fully aligned with Santos' brownfield growth strategy of building on existing positions around the 5 core assets. Northern Australia has the potential to become a major LNG hub for the long term, supported by Santos' regional offshore gas resources of more than 10 Tcf gross. Our onshore position in the Macapa Basin provides further multi PCF resource potential. The acquisition also unlocks opportunities to create value through strategic partnerships and bring discovered resources to market, leveraging Santos' strong operating capabilities. The acquisition is value accretive for Santos shareholders in year 1 across a range of metrics. We expect 19% EBITDAX accretion and 16% earnings per share accretion in 2020. We also provide a significant boost to our reserves and QC resources. As it reduces our 2020 forecast free cash breakeven by $4 per barrel. We are targeting pretax synergies of between $50,000,000 $75,000,000 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 new 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 downfield nature and proximity in key Asian markets is attractive to buyers and has been well received in the market. Barossa is among the lowest lower cost of supply options for new global LNG supply and provide robust economics in the current LNG Chem contracting environment. Prior to taking FID on Brosa, we are targeting to contract between 50% 80% of LNG volumes for 10 years. Santos has prepared to sell down its interest in Power and LNG and Barossa between 40% to 50% to increase partner alignment and is in discussions with existing joint venture participants. SK, a partner in Barossa, has signed a letter of intent to acquire a 25% interest in Bio London and Darwin LNG. This will further align Santos and SK towards the development of Gautra, which is a key priority for both companies. The acquisition of Chonico's assets is fully funded from existing cash resources and new committed debt. Importantly, Sandclos has the benefit of cash flows generated from the acquired business from the effective date of the 1st January 2019 completion. And this cash is combined with proceeds from the expected sell down to SK, net Santos cash funding requirement after completion and sell down was reduced to between $775,000,000 $825,000,000 To put this in perspective, this is less than Sandoz's free cash flow in the 1st 9 months of this year. This strong free cash flow generation supports profit de gearing as we have demonstrated following the acquisition of Cauldron last year. Gearing our completion, we expect to be around 35% to total the sales around KST and then decline to approximately 30% by the end 2020. Deleveraging is supported by Santos' strong free cash flow profile and proceeds from potential sell down transactions. In addition, we have the flexibility to optimize the broader Sandoz asset portfolio and strategically align farmers and disposals. As I've consistently said, our gearing target and normal operating conditions is between 20% 30%. This is what we refer to as the green zone. We will go up to 35% from major growth and or M and A activities that we're announcing today, but 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 and it's fully aligned with our strategy, value accretive to Santo's shareholders, fully funded and continues to strengthen our operating and development capability and capacity. We look forward to welcoming Conifer Phillips' Australia West employees to Santos and combining our 2 businesses. We're now happy to take your questions. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Our first question is from James Redfern from Bank of America Merrill Lynch. Sorry about that. We've really exchanged lines to the study. We'll take the next questionnaire from Evan Martin from Morgan Stanley. Please ask your question. Good morning, Kevin. Obviously, this year's been a record year for sanctions globally. I think it's been about 60,000,000 tonnes across the globe. I mean, how defensive do you think this product is from an LNG break even price? You sort of alluded that it's towards the bottom. But can you give some numbers? Or can you provide some context there, please? Please? Ali, Adam, I'm not busy. We'll give you some more guidance towards the end of the year, perhaps it's our investment in a couple of months' time. What we can say about Parossa, it's an offshore upstream down through project. And as we've said repeatedly, it's at the lower end of the cost curve in terms of cost of supply. It's a very competitive project in the global LNG environment. And it's got 2 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. Okay. And just on Conoco's reasons to sell, is there any sort of anything you can derive there on your thoughts why they want to sell? Or obviously, other assets in Australia still can you provide any context there? So look, I think that's the question for ConocoPhillips. We've just been well speculating over a long time. It's really a question for them other than seeing, I think it's just part of their overall strategy. Okay. And just final question, CO2 removal. In the process, it's quite high in CO2. Can you talk about that, the plan for that and what the steps are? Yes. Well, look, I mean, Santos have made their longer term aspirations for CO2 levels and emissions reduction at the Republic. And we're working on a number of things there across the business to do that, in particular, the CCS projects across the Cooper Basin. And I think you'll see a lot more of that over the course of the next year. But we are developing what we believe are very robust and sound strategies for CO2 amortization and for emissions reductions as we go forward. And I mean, we'll reveal more details of our actions developed on hand as we get the results of our tests and the competition. Our next question is from Mark Stansler from NSP. A couple of questions. First one, just when we think about the growth strategically and maybe around the sector you had mentioned, potentially selling out some expertise to this pay now. Is there a scope to sell to parties outside of the JV? And I guess a few things we think about expansion capacity, maybe talk through your position as operator there and perhaps if I was in the B2B or someone in the B2B? Is this a project you acquired today? Well, look, I lost the last part of that, Mark. But I think I got the gist of your question. So thanks. Look, I think, first of all, our focus is on working with all the partners in Darwin and in Barossa and helping get a much stronger line up of partners across a few projects. And we've had very encouraging early conversations with many of the partners. So that's our focus for Brossa. And 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 would very definitely looking at all resource owners in the region. And we want to make the pie bigger. And it doesn't have to be just Taiwan LNG Partners. If there's other resources out there, then we want to know how we can go through Darwin and expand Darwin. As I said in the in my speech earlier that we all Conoco already have approval for 2 other frames at Darwin, the site that lays out that approval takes full capacity to a potential 10,000,000 tonnes per annum. So there's a lot of capacity there. As you rightly point out, there's a lot of resources in the region. And so we will be looking to work with other resource owners in the region to build a book, if you like, for potential upstream resources to fill those trains. And then very much beyond 2025. Our focus on the short and medium term is on delivering Barossa. And then I guess the migration, GMR expects a little bit of a few cents or a month, but we think that the infrastructure of the JV with Future Trains, how does the ownership structure work? And we think to bring other the future trends? Well, look, it's very early, both to be told about what that might lead. But what I can say is definitely feasible. That you can have different ownership structures on all three trains in Darwin once they were constructed. And certainly, that's what I would expect would happen over time. And basically, you have different upstream joint ventures potentially having their own trains. I might just ask a simple question to Anthony. Sorry, Anthony, but just around the abandonment liabilities that you highlighted about $1,100,000,000 that's wise. Can you give us just a bit of a feel on the timelines and expectations around that number? Yes, that is gross. The sell down obviously reduces our exposure to that number as well. So we've already got 11% of that and a sell down to SK of 25%. And then it only changes it by 35% more from Sandoz's net perspective. It is spent over a few years. We're expecting it in the field life to be around that 2020 timeframe. And then obviously, we've worked with availability of services and regulators to then work out what the right spending pattern is in timeframe. Also depends on what could be left in situ. So corporate processing, but the ability to spend the money over quite a few years. Just a quick question, I mean, just double checking, but I presume the gearing numbers based on the assumption of Dorado 80% at the moment. Yes. Yes. Thanks, guys. Thank you. And our next question is from Ben Wilson from Royal Bank of Canada. Thanks for taking the question. I just want to unpick your outlook for the acquisition synergies, the €50,000,000 to €75,000,000 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% to 75% intended to be sustained by Santos, preferably from what we'd assume to be the life of the Perosa 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 the Quadrant, not very definitely sustainable savings that come from basically the very definitely sustainable savings that come from basically the combining of different businesses into 1. And 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, that you get a benefit from when you have a different ownership position. And we found that very much to be the case in Western Australia, whereas you know, we're the top end of guidance on delivery of those synergy values. Okay. Thanks for that. It's just a bit of an unusual situation considering the 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. And 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. I mean, as Anthony's the gearing ratio is very manageable. So within the operating model restrictions that we put on our business and is completely compliant with that. And 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. And so we'll be very focused on that over the next few months as we complete this deal. So a lot of headroom, and we're very confident even as we continue into project execution mode over the course of the next 4 or 5 years. Our gearing ratio will stay within those levels that we've communicated consistently. Okay. That's great. Thanks very much. Thank you, Dan. Our next telephone question is from Daniel Butcher from CLSA. Please ask your question, Off the question that's been asked already, I was curious with your gearing during the CapEx phase of 25% to 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, too, if you include the FOG on those projects. Well, Arthur, why don't you stick to the capital management? It's Ben, how are you? Yes. Look, I've said a slight timing in the back includes the projects for PNG, LNG, Crossett, Factual, Dorado and selling down assuming sell down interest in Russia as well. So the range of 25% to 30%. We have sort of factored in all of that growth projects that we had in the period from 2021 to 2024 plus the slowdown. We'd like to target equity for the ROCE project of about 40% to 50%. Okay. Very clear. And I just noticed that in the discussion about off offtake, you're only speaking to one of the current partners in the LNG. I'm just curious if you think the other 2 or 3 income as well from offtake? Or are they less interested? Look, I mean, the conversations we're having with buyers are confidential, Edmond. 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 we're marketing are very welcomed in the market. There's a lot of appetite for them. And as I say, we're talking to a short list of few buyers in very advanced discussions. And just one follow-up on Adam's question about CO2. I mean, I know she sort of fixed some of what you're doing in the Cooper in your response. So I take it from that, there's no specific gas reinjection of CO2 or anything else planned for Barossa, maybe you can do a little bit 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 today in place with Ultradental, who are widely recognized as the global leaders in CCS technology and carbon capture type of technology. And 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 an offset for emissions elsewhere. Okay. Very clear. I'm sorry, just to see about CapEx. I mean, I think it's only, what, 8 or 12 worlds up and you have to chop off. So I'm just wondering, is the vast majority of that would be applicable platforms removal order? I'm just curious how much of that would be actually deferred if you put them in situ and so forth. Yes. Well, look, I mean, as Anthony said earlier, all of that's going to be agreed and it will be agreed at a later day. And 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 buy into the pipeline for the Barossa project. But yes, I mean, the Wells P and A that's a key from an environmental perspective, doing that properly. The rest is actually pretty straightforward. And we will be hard at that. We'll look at ambivalence that she will can. 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 still largely to be developed. Our next telephone question is from James Redfern from Bank of America. Yes. We're off track with James. So let's get to the door. Yes. Sorry about that. I'm not sure what's going on. Well done on the Grant transaction. I just want to ask about the net of incentive SK for the 25% interest in A1 sorry, inbound LNG. So should we assume that's on equivalent terms to this transaction in terms of pricing? And then just want to confirm that you're also looking to sell down in Rossa as well, which we should expect to be completed next year? Okay. So thanks for that, James. Look, I mean, I think the LOIs in terms of the LOI are confidential and those completed. Basically, once that's completed and we've signed the SBA, we can give you the details of that agreement. But I think your premise is a fair one to go on, but it's on equivalent terms. I mean, I think it's okay to say that. And as Anthony alluded to earlier on, as Mike 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 to get around the Varossa project and to make it happen and be supportive of that. So we will do what we need to do to get that alignment, I guess, is what I'm saying. The next question is from Paul Phillips from UniSuper. Please ask the question, Paul. Good morning, Neil. A few sort of mechanical questions, if you like. In terms of the 775 to 825, what is the anticipated completion date? Is it the 30th 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, Paul. It would be around year end, maybe a little bit. Okay. Okay. Good. So the 25% to 30% in expected gearing from 'twenty one to 'twenty four, That's at $65 oil. What sort of Aussie dollar oil are you assuming? In that, we're assuming $0.75 $0.75 Okay. And that's post the sell down to SK, but no sell down of Parossa, which would then have implications to CapEx and everything else as well. The next telephone question is from Baden Moore from Goldman Sachs. Just a quick question on the side of 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, Vikram, I think first of all, in terms of the strategic opportunity there, we see that sitting right next to our Crown Laster resources in that Northern Browse area, which combined, I think, gives us a resource of over 5 Tcf of gas in our region. How we monetize that, too soon to see. But obviously, we'll look at that going forward. Anthony, do you want to talk a little bit about value? Yes. Look, I believe we're obviously not putting a lot of value on it. It's still a discovered resource. And it's still got a lot of potential to go forward with that we need to evaluate over time. It is there are 7 discoveries in that site in the area, and it's 500 meters of water depth. So no outstanding commitments. And there's been 8 wells drilled in that area since 2009. So it is a good discovery. It does have potential. But it still needs a lot of work in that area on up year accumulation and consolidation. As is the current last of our fiscal year, a solution we've just not been big enough to support any development that's been stranded for a long time. Cumulatively, the potential is there. And that's something that when you look at that, when there's a lot of the other stranded resources offshore at Barwin, we have Petrochem Frigate in the Bonaparte Basin, which is around 2.5 PCF as well. There's a lot of resource strandies. And that's before you look at the onshore opportunities. As I said earlier, Ned Baden, the focus is very much here on delivering ROSA, embedding down the integration of the organizations in the West And 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. And our final question today is from Scott Ashton from Shah Energy. Please ask your question. Good morning, Kevin. And Anthony, just a quick question. How does the RRT mechanism work in all of this? What is we're also going to sort of benefit from some of the ARRT credits that should be in value in them? Just want to because you've made a comment about it being quite robust given the liquids cost. I'm just trying to understand how that may integrate into the bigger development. So it's a completely separate project. Why don't you hand that one to Anthony? No, you're right. So thanks, Scott. Yes, no, it's Rossum's project. So no benefit between Bayou and Grosso. Okay. So you don't have any transferability or anything like that? We have exploration we have offshore exploration transferability across our portfolio. Thank you. And I think that concludes our call. Thanks, everybody, for dialing in, and we look forward to catching up with some of you over the course of the next few days and beyond. Thank you.