Santos Ltd (ASX: STO) has announced a very large acquisition to investors, is the share price a buy on the news?
Santos is one of Australia’s largest oil and gas companies. Founded in the 1950’s, Santos owns and operates one of Australia’s largest portfolios of oil and gas fields, connected by extensive pipelines and complementary facilities.
Santos’ Large New Acquisition
Santos has announced that it is acquiring the northern Australian interests of ConocoPhillips. It will gain operating interests in Darwin LNG, Bayu-Undan, Barossa and Poseidon for US$1.39 billion.
There’s also a $75 million million contingent payment subject to FID (final investment decision) on Barossa.
The acquisition is fully funded from existing cash resources and new committed debt. It’s expected to add 16% to profit / earnings per share (EPS) in 2020 and 19% to operating profit / EBITDAX (click here to learn what EBITDA means, the X stands for foreign exchange)
It’s expected to increase ‘pro forma’ production by 25%. ‘Pro forma 2P reserves will be increased by 5% and pro forma 2C contingent resources will be increased by 27%.
How Will Santos Improve The Business?
One of the main things to question about an acquisition is why it makes sense to be under the acquiring business’ ownership – is there an operational advantage? Or is Santos simply increasing its business size?
Santos said it’s targeting pre-tax synergies of US$50 million to US$75 million per year, not including the integration and other one-off costs.
This acquisition reduces the forecast 2020 free cash flow breakeven oil price by US$4 per barrel.
Why Is Santos Doing This?
Santos is attracted to this because it delivers operatorship and control of LNG infrastructure with growth potential.
It also advances and supports Santos’ goal of taking Barossa to FID by early 2020. The company is prepared to sell down equity in Barossa and Darwin LNG to target ownership of 40% to 50% to achieve increased partner alignment.
Barossa partner SK E&S is highly supportive and has signed a letter of intent to acquire a 25% interest in Bayu-Undan and Darwin LNG.
Santos is also in discussions with existing Darwin LNG joint-venture partners for equity in Barossa and in advanced discussions with LNG buyers for Barossa offtake volumes, including with an existing partner in Darwin LNG.
Is The Santos Share Price A Buy?
Santos has done well since 2016 and 2017, although it’s still far below its all-time high.
This seems like a very attractive acquisition, but Santos is too dependent on resource prices for me to consider adding it to my own portfolio. I prefer buying reliable shares like the ones in the free report below.
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