OPINION | Santos acquires Quadrant Energy

Australian operator Santos has acquired Quadrant Energy for an upfront consideration of US$2.1 billion plus contingency payments linked to resource certification and FID on the recent Dorado discovery. The price paid is a slight premium to our valuation of Quadrant Energy’s production portfolio, but the Dorado discovery offers material value upside on the deal.

Key drivers for the deal include rebalancing the portfolio towards lower cost, conventional oil and gas assets, strengthening Santos’s position around key gas production hubs in Western Australia, and boosting the company’s near-term cash flow.

This will offer near-term production growth and increased cash-flow to fund the revitalisation of the Cooper Basin production and the next phase of LNG projects such as Caldita-Barossa and PNG LNG expansion. The deal also emphasises the importance of Australia to Santos following the divestment of assets in Southeast Asia.

The Dorado discovery also offers considerable exploration upside and medium-term oil production growth. Santos has moved fast to lock in the dominant position in this exciting emerging play at an attractive price. Certainty of operator confirms the development will progress. However, questions remain on whether Santos selects the fastest route to monetisation or attempts to appraise the remaining permits in the Bedout Basin.

For Quadrant Energy’s backers, Macquarie Capital, Brookfield Asset Management and Wesfarmers, the price received is in line with the US$2.1 billion paid to Apache in 2015 for the assets that were rolled into Quadrant. We estimate Quadrant Energy has generated around US$1 billion in free cash flow in the intervening period, with the Dorado contingency payments offering additional upside to the deal.

After rejecting Harbour Energy’s bid earlier this year, Santos’s management has had a point to prove to its shareholders – that the company had emerged from survival mode and is ready to grow again. This deal certainly does that, plus it centres around assets the company already knows very well.

What’s next for Santos? De-risking the Dorado development through a farm down or further exploration and appraisal.