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GLNG pipeline sale mooted

Santos could be looking to selloff its Gladstone liquefied natural gas (GLNG) pipeline as the company comes under increasing financial pressure

With the Australian firm’s share price recently hitting a 10-year low on the back of plunging crude prices analysts believe Santos may be forced to sell some assets, including the pipeline which will ship coal-bed methane (CBM) to its export plant in Queensland. 

The speculation comes in the wake of BG Group’s recent deal to sell its gas pipeline to APA Group for A$6 billion ($4.9 billion). That pipe will also transport CBM to the UK gas player’s Queensland Curtis (QC) export scheme. BG’s QC pipeline, part of its $20.4 billion liquefied natural gas (LNG) export venture in the eastern state, is underpinned by long-term take-or-pay supply deals with subsidiaries of the group, as well as its partner in the project, China National Offshore Oil Corporation. But unlike BG’s plant, which is due to start anytime, the GLNG venture is not expected to ship first gas until mid-2015, making any pipeline deal unlikely in the near term.

UBS analyst Nik Burns has suggested that “there is too much uncertainty surrounding the gas resources underpinning the project to attract serious interest, and Kogas has reportedly attempted to sell its stake in the project twice with no success”. Santos, which has a 30% stake in GLNG, could net some A$1.5 billion if it sold the pipeline. 

Despite the relatively attractive deal BG clinched for its pipeline sale, the drivers of Malaysia’s Petronas and South Korea’s Kogas, both national oil companies and partners in the GLNG project, as well as French major Total, may be different from those of Santos.

GLNG’s owners would likely prefer to close a sale in six months time once the project is closer to its first shipping date, when they could fetch a higher price as the development risk recedes. 

Despite the talk in the markets that Santos needs to raise $2 billion to shore up its balance sheet and invest in undeveloped resources to bolster growth, the company’s chief executive, David Knox, has reiterated that its funding remains “robust” with about A$2 billion in cash and undrawn debt available.

Santos is on track to reap cash-flow benefits in 2015 and 2016 from its investments in the Papua New Guinea LNG (PNG LNG) project, which started up earlier this year, as well as GLNG next year. “The company has no present need or intention to raise equity,” said Knox. However he did reveal a 25% cut to Santos 2015 capital expenditure budget. The company will slash A$700 million from its budget in response to falling oil prices that have knocked off more than A$8 billion from its market value since early September. By mid-December the company was worth just under A$7 billion.

With more than half its market capital wiped off in under four months Santos could be a target for a larger player, given its stakes in the PNG LNG and GLNG schemes, not too mention its interests in large undeveloped gasfields in the Browse basin off Australia, as well as its solid position in the Cooper basin and unconventional assets across Queensland, the Northern Territory and New South Wales. “These sort of projects (LNG) are good for large companies,” Canaccord analyst Johan Hedstrom told the Australian Financial Review. “It is an opportunity that does make them a bit vulnerable. I don’t think you’d get it for A$10 (billion) but for a Sinopec, PetroChina or someone like that A$12 (billion) or A$13 billion is not a big deal”.

John Hirjee, an analyst at Deutsche Bank, says Santos is in good shape financially, having posted its highest oil production in six years for the half-year ending June 30, as well as delivering record sales revenue and strong operating cash flow of A$744 million over the period. Hirjee noted that he remains comfortable with Santos’s funding position to finish the GLNG scheme as it has considerable undrawn debt facilities. Even with oil prices at $60 per barrel next year, the company would have some A$600 million in excess funding. 

Meanwhile, Reuters reported China’s Sinopec is in talks with BP, among others, to sell some of its long-term LNG supplies from its 4.3 million tonne per year (t/y) chunk of Origin Energy’s Australia Pacific CBM-to-LNG project, due to start up next year, in Queensland. Sinopec is exploring options to sell the UK supermajor up to 1 million t/y over 2016 and 2017 from the scheme, which could be extended to run until 2020. 

Based on the recent plunge in crude prices, there is a greater risk that China could cut its domestic oil-linked natural gas price in the near term for the first time, noted analysts at Wall Street research firm Bernstein. They added that in China at lower levels “LNG and pipeline imports make little sense for producers”.

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