Kumul pays Santos US$1.4bn for 5% of PNG LNG

Having witnessed the share price tumble by around -13% since mid-September on the back of weaker oil prices, Santos was up around 2% at the open after the oil major received a binding conditional US$1.4bn offer from Kumul Petroleum Holdings for a 5% stake in its PNG LNG project.

This includes a proportionate share of project finance debt of around US$300m.

Kumul is PNG’s national oil and gas company, and an existing partner in the PNG LNG project.

Today’s sale coincides with Santos’ global roadshow within which management is showcasing the company as a top-10 global independent energy group, and a low-cost producer of LNG and domestic gas.

PNG increases its stake

Assuming Kumul obtains the waivers of pre-emptive rights by each existing partner in the PNG LNG project, plus the necessary regulatory approvals and financing, the sale will:

• Increase the equity interest of the PNG government to about 22%, in-line with PNG’s plans for it people to have a greater equity interest in the development of their natural resources.

• See the Santos stake in this world-class project fall to 37.5% but will remain the largest investor in the project.

Meantime, Kumul has paid US$55m to Santos that will be held in escrow to be released to Santos as a deposit for part payment of the offer price if it accepts the offer, which remains open until December 31.

This effectively means Santos retains all 2022 cash flows.

Stronger partnership

Commenting on the deal this morning, Santos boss Kevin Gallagher notes the deal could help the company build a stronger partnership with the PNG government.

“PNG LNG is a low-cost and low emissions intensity asset that contributes strong cash flows to the project participants and economic and social benefits to the nation,” Gallagher noted.

“Santos has been a committed partner in PNG for over 40 years, involved in more than 30 different licenses and has significant community partnerships and projects across the nation.”

As part of the proposed transaction, Santos and Kumul will negotiate a Heads of Agreement to further collaborate on the development of Kumul’s regional capacity and capability, including carbon emission reduction opportunities to achieve net-zero operations.

What is PNG LNG

As Santos’ highest producing asset, accounting for more than half of the group’s value in sell-side analysts’ models, PNG LNG exports LNG sourced from three primary gas fields to major markets in north-east Asia.

The project includes gas production and processing connected by more than 700k of onshore and offshore pipelines, to a two-train LNG plant and storage facility located near Port Moresby.

In 2020 the plant produced a record 8.8m tonnes of LNG, shipped through 115 cargoes.

What brokers think

The Santos share price is up around 2% over 12 months.

Consensus on Santos is Strong Buy.

Based on Morningstar’s fair value of $9.79 the stock appears to be undervalued.

Based on the seven brokers that cover Santos (as reported on by FN Arena) the stock is currently trading with 38.2% upside to the target price of $9.67.

All brokers have a Buy (or Buy equivalent) rating on the stock with target prices ranging from $8.54 to $11.00.

Look out for broker updates to follow today’s announcement.

Santos share price over three months.