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Santos share prices rise after GLNG starts shipping

The price rise followed the maiden shipment of LNG from its $18.5bn Gladstone LNG export project

The Seri Bakti left the port of Gladstone carrying a cargo of 146,000 m³ of LNG to Korea Gas Corporation, a 15% owner of the GLNG venture. The start-up comes after Santos and its partners, which also include Malaysian national oil company Petronas and French major Total, spent “roughly $10,000 a minute for the last seven years” in bringing it to fruition, Santos’ chief executive, David Knox, said as the ship set sail.

Santos’ survival was in doubt just a few months ago because the oil price collapse jeopardized the potential financial performance of GLNG, which saw investors fleeing and Santos’ share price collapsing from around A$15 in mid-2014 to a low of A$3.98 on 30 September. But it surged 38% to A$5.48 on 19 October.

Santos executive chairman, Peter Coates, who is carrying out a strategic review into a broad-scale asset sale programme that is hoped will help ease the burden of the company’s A$9bn ($6.54 bn) debt pile, insisted that GLNG would prove extremely valuable in the longer run.

At the official launch of the Seri Bakti, Petronas and Total signaled their interest in Australian acquisition opportunities. Both companies have been cited by analysts as potential suitors for some of Santos’ assets, or even the company itself.

Investment bank JP Morgan reckons the $18.5bn needed to build GLNG will make a return of around 6%. When Santos broke ground on the project the forecast return on capital was at least twice that, but that was before the oil price dropped below the $50 mark.

Some investors are starting to back Santos again. Even Citi, a US bank with one of the more pessimistic oil price outlooks, has a 12-month share price target on the Australian company of A$9.66. Citi expects Santos will repair its damaged balance sheet, including an expected $1.2bn injection from assets sales.

Santos is expected to make announcements on the asset sales in November. Analysts say PNG LNG would be the easiest to sell and estimate it could fetch some $4bn.

Santos is keen to hold onto its LNG assets. Coates declared his reluctance to sell its 13% stake in the ExxonMobil-led Papua New Guinea (PNG) LNG project and 30% interest in GLNG, which are “not high on our list to sell.” There is a huge amount of interest in its stake in PNG LNG, which is one of the most profitable export projects around and has expansion potential.

But Coates’ comments indicate the Adelaide-based player is leaning towards selling its assets in Western Australia and Asia. And despite the weak oil market Santos is focusing on strategic buyers.

Total, which aside from GLNG, has investments in Inpex’s $37bn Ichthys LNG development in northern Australia and upstream assets in the Bonaparte basin, said it was keen to add to its Australian business, despite the cutbacks in capital expenditure and costs announced in September. Petronas, which has previously voiced enthusiasm for Australia because of the low-country risk compared to other gas-rich regions, like the Middle East, signaled its interest in potential acquisition opportunities too.

The start-up of the 7.6m mt/year GLNG plant, which began production last month, follows the two trains at BG’s QC LNG, demonstrating that the engineering behind coalbed methane to LNG works. The cash flows it will generate will be a welcome relief too. Santos reported that GLNG is cash-flow positive at least as low as $40/barrel – roughly $10 below current prices.

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