Santos announces acquisition of Quadrant Energy

Key Highlights

  • Acquisition of 100% of Quadrant Energy (Quadrant) for US$2.15 billion plus potential contingent payments related to the Bedout Basin
  • Fully funded from existing cash resources and new committed debt facilities, with rapid de-gearing expected to <30% by the end of 2019
  • Value accretive acquisition of long-life WA conventional natural gas assets with stable cash flows
  • Consistent with Santos' growth strategy of building on existing infrastructure positions around core assets to deliver sustainable shareholder returns
  • Advances Santos' aim to be Australia’s leading domestic natural gas supplier
  • Increases proforma 2P reserves1 by 220 mmboe, up ~26% and proforma annual production2 by 19 mmboe, up ~32%
  • Significant portfolio overlap with Santos provides combination synergies estimated at US$30-50 million per annum (excluding integration and other one-off costs)
  • Upside through further material synergies, near-term developments and exploration
  • Material earnings, cash flow and value per share accretion
  • Opportunities to leverage Quadrant’s offshore operating capability across Santos’ Western Australia and Northern Australia portfolio

Santos Managing Director and Chief Executive Officer Kevin Gallagher said Santos has enjoyed a long-established relationship with Quadrant which has operated its WA natural gas assets for many years developing a well-deserved reputation as a safe, high reliability and low cost operator.

“This acquisition delivers increased ownership and operatorship of a high quality portfolio of low cost, long-life conventional Western Australian natural gas assets which are well known to Santos, and importantly significantly strengthens Santos’ offshore operating capability.”

“It is materially value accretive for Santos shareholders and advances Santos’ aim to be Australia’s leading domestic natural gas supplier.”

"The transaction lowers our proforma 2018 forecast free cash flow breakeven oil price by a further $4/bbl and Quadrant's stable cash flows provide increased certainty during the upcoming period of major growth project delivery.”

“We look forward to welcoming Quadrant’s staff to the Santos family and integrating our Western Australian operations,” Mr Gallagher said.

1  Proforma reserves based on Santos and Quadrant 2P reserves as at 31 December 2017.

2  Proforma production based on Santos and Quadrant production for the year ended 31 December 2017.

Quadrant Portfolio Overview

Quadrant Energy holds natural gas and oil production, near and medium term development, appraisal and exploration assets across more than 52,000 km2 of acreage, predominantly in the Carnarvon Basin offshore WA, Australia’s largest offshore oil and natural gas province.

Quadrant’s share of production from the assets in 2017 was 19 million barrels of oil equivalent (mmboe). 2P reserves at the end of 2017 were 220 mmboe (~75% developed).

Quadrant’s conventional natural gas assets include significant portfolio overlap with Santos, providing opportunity to realise material combination synergies estimated at 

US$30-50 million per annum.

Asset

Devil Creek

gas hub

Varanus Island gas hub

Macedon

gas hub

Ningaloo Vision FPSO

Pyrenees

FPSO

Nameplate capacity

220 TJ/day

390 TJ/day

 

220 TJ/day

540 kbbl

oil storage

850 kbbl

oil storage

Ownership

Quadrant 55%

Santos 45%

Quadrant 55%

Santos 45%

Quadrant 28.6%

BHP 71.4%

Quadrant 52.5%

INPEX 47.5%

Quadrant 28.6%

BHP 71.4%

Operator

Quadrant

Quadrant

BHP

Quadrant

BHP

Quadrant’s portfolio also includes a large inventory of discovered resources to backfill existing infrastructure and a leading position in the highly prospective Bedout Basin, including the recent significant oil discovery at Dorado (Quadrant 80%) which provides near-term development opportunity and unlocks material exploration potential.

Acquisition Rationale

The acquisition of Quadrant is fully aligned with Santos’ growth strategy to build on existing infrastructure positions around the company’s core assets.

Quadrant delivers operatorship of Santos’ existing gas hubs in WA, providing flexibility to optimise operations and position Santos to capture value from backfill and third party gas opportunities. It also strengthens Santos’ offshore operating expertise and capabilities to drive future growth opportunities across offshore WA and northern Australia.

Quadrant’s portfolio of high-margin conventional domestic natural gas assets backed by medium to long-term CPI-linked offtake contracts provide strong and stable cash flows, and compliment Santos’ predominantly oil-linked revenues.

The acquisition is financially compelling and value accretive for Santos shareholders:

  • ~17% estimated free cash flow accretive on a per share basis in first full year of ownership;
  • Increases proforma 2P reservesby ~26% and proforma productionby ~32%;
  • A $4 per barrel decrease in Santos’ forecast proforma 2018 portfolio free cash flow breakeven to ~$32 per barrel.

The acquisition will have an effective date of 1 January 2018. Completion is expected by the end of 2018 and is subject to customary consents and regulatory approvals.

Consideration

Under the agreement, Santos will acquire 100% of Quadrant for consideration comprising an upfront payment at completion and potential future contingent payments as follows:

  • US$2.15 billion upfront payment on a cash and debt free basis;
  • Contingent payments linked to Dorado oil/liquids 2C resource certification of
    >100 mmbbls and future FID decision (Certification Payment); and
  • Royalty over any future Bedout Basin project revenue (excluding production of Dorado oil/liquids).

The Certification Payment:

  • Comprises contingent fixed and variable payments linked to certified Dorado 2C oil, condensate and natural gas liquids resources at FID; and
  • Subject to a minimum 100 mmbbls (gross) certified 2C resource.

Calculation of the Certification Payment:

 

Payment Type

Amount

Calculation

Fixed payment

US$50 million

Triggered on 100 mmbbls (gross) certified 2C resource

Variable payment

US$2.00/bbl

For each barrel certified between 100-125 mmbbls (gross)

payable on Quadrant’s working interest net barrels (80%)

US$2.50/bbl

For each barrel certified >125 mmbbls (gross)

payable on Quadrant’s working interest net barrels (80%)

 

Acquisition Funding

The acquisition is fully funded from existing cash resources and US$1.2 billion in new committed debt facilities. Santos had US$1.5 billion in cash on hand as at 30 June 2018.

The new committed debt facilities comprise a US$600 million five and a half-year bank term loan facility and a US$600 million two-year bridge facility. It is intended that the bridge facility will be refinanced post-completion of the acquisition.

Santos intends to maintain a strong financial profile consistent with an investment grade credit rating. Net gearing is expected to be ~34% at year-end 2018 and is expected to decline to <30% by the end of 2019. Santos also intends to maintain available liquidity in excess of US$2 billion.

Santos confirms there is no change to the company's dividend policy announced on 28 June 2018. Santos intends to pay ordinary dividends that are sustainable through the oil price cycle and will target a range of 10% to 30% of free cash flow generated per annum. 

Conference call

Santos will host a conference call for analysts and investors today at 5:30pm AEST. Dial-in numbers are listed below. Please quote passcode ID: 9291678.

For locations within Australia dial toll-free 1800 123 296 or toll 02 8038 5221.

For other countries, please use one of the following toll-free numbers: Canada (1855 5616 766); China (4001 203 085); Hong Kong SAR (800 908 865); India (1800 3010 6141); Japan (0120 994 669); New Zealand (0800 452 782); Singapore (800 616 2288); United Kingdom (0808 234 0757); United States (1855 293 1544). For all other countries or operator assistance, please call +61 2 8038 5221.