Santos Acquires Quadrant Energy for $2.15 Billion

The Australian Energy Company Santos Is Set to Acquire Its Countryman Quadrant Energy for US$ 2.15 Billion, Plus Contingent Payments Related to the Resources of the Recent Dorado Oil Discovery.

Quadrant Energy holds natural gas and oil production, medium and long-term development, assessment, and exploration assets over more than 52,000 km2 of planted area, mainly in the Carnarvon Basin, WA, Australia’s largest offshore oil and natural gas province.

The company recently achieved what is believed to be Australia’s largest oil discovery in years at the Dorado-1 well.

Quadrant’s share of production from the assets in 2017 was 19 million barrels of oil equivalent (mmboe).

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According to Santos, Quadrant’s 2P reserves at the end of 2017 were 220 mmboe (~ 75% developed). Quadrant’s conventional natural gas assets include a significant portfolio overlap with Santos, providing an opportunity to realize estimated material combination synergies of US$ 30 to US$ 50 million per year, Santos said.

Rationale

Santos stated that the acquisition of Quadrant was “fully aligned with Santos’ growth strategy to build existing infrastructure positions around the company’s key assets.”

The company said: “Quadrant operates Santos’ current gas hubs in WA, providing flexibility to optimize operations and position Santos to capture value from third-party backfill and gas opportunities. It also strengthens Santos’ operational expertise and offshore operational capacity to drive future growth opportunities across offshore WA and northern Australia.”

“Quadrant’s portfolio of high-margin conventional domestic natural gas assets supported by long-term contracts and linked to CPI provide strong and stable cash flows and complement Santos’ predominantly oil-linked revenues.”

Santos will pay US$ 2.15 billion upfront in cash, along with contingent payments linked to the certification of 2C oil/liquids resources from Dorado of more than 100 million barrels and to the future FID decision; and a royalty on any future revenue from the Bedout Basin project (excluding Dorado oil/liquids production).

For a detailed analysis of the Dorado contingent payments, see the chart below, as shared by Santos:

As reported last week, Quadrant’s partner in Dorado, Carnarvon Petroleum, said that Dorado contained approximately 171 million barrels of oil (2C), making it one of the largest oil resources ever found on the North West Shelf.

Santos will finance the resource acquisition from existing cash and US$ 1.2 billion in new committed credit lines. Santos had US$ 1.5 billion in cash as of June 30, 2018.

Santos Director: “This Quadrant Will Help Us Become the Leading Gas Supplier in Australia”

While the oil discovery at Dorado is certainly exciting, commenting on the acquisition of Quadrant, Santos’ managing director focused on Quadrant Energy’s gas assets.

Santos’ managing director and CEO, Kevin Gallagher, said: “This acquisition provides greater ownership and operation of a high-quality portfolio of low-cost, long-life natural gas assets in Western Australia that are well-known to Santos and significantly strengthen offshore operational capacity.”

“It’s a material positive value for Santos shareholders and advances Santos’ goal of becoming Australia’s leading domestic natural gas supplier.”

“The transaction reduces our forecast free cash flow for 2018 relative to the oil price by more than US$ 4/bbl and the stable cash flows from Quadrant provide greater security during the upcoming period of significant project delivery.”

“We look forward to welcoming the Quadrant team to the Santos family and integrating our operations in Western Australia.”

Quadrant CEO: Exciting New Chapter

Quadrant Energy was established in 2015 following the completion of Brookfield and Macquarie Capital’s acquisition of Apache Energy.

Commenting on the news about Santos, Quadrant Energy CEO Brett Darley said he is “extremely proud of the entire Quadrant Energy team who, over the past three years, have transformed Quadrant into a highly successful standalone business.”

“We have delivered operational excellence, outstanding results in our exploration program, and successfully integrated a whole new business model across the company. All of this has been achieved with a strong focus on the environment and a commitment to the health and safety of our people,” Darley said.