ADNOC looked at Santos LNG assets before buyout bid

It is believed ADNOC was looking at Santos LNG assets before launching a $30bn buyout bid with The Carlyle Group. Picture: Bloomberg

The Abu Dhabi National Oil Company was initially in talks with Santos about buying assets in the business before it launched a $30bn all-of-company buyout with backers, say sources.

ADNOC and partner The Carlyle Group are currently carrying out due diligence on Santos and are expected to make a final offer for the business next month when the due diligence period ends.

DataRoom understands that among the issues to have surfaced amid due diligence are the abandonment liabilities for the Western Australia Santos assets and the costs for the development of the Papua LNG project being higher than expected.

The $US19bn ($29bn) project is 37 per cent owned by ExxonMobil, while Santos owns 22.83 per cent.

Well-informed industry sources say that because ExxonMobil is a top operator with high standards its projects are expensive, which would be why Papua LNG costs would be high.

The suitors would likely have already established before bidding for Santos that they may need to have added extra provisions for the Western Australia assets, say sources.

However, neither issue is expected to be a deal breaker, with the biggest challenge still remaining gaining regulatory clearance.

Sources say that ADNOC initially explored buying assets before bidding for Santos as a whole, with LNG assets, including those in PNG and its Barossa project north of Darwin, along with the Alaska development, having the most appeal.

Investment bankers have been pitching the Santos domestic oil and gas assets in the market in the anticipation that the owners may be prepared to sell the assets, or could be forced to divest parts of the business as a condition for gaining Foreign Investment Review Board approval.

One party that may have already knocked on the Santos or ADNOC door to test the appetite for domestic asset sales is Beach Energy, with its chief executive Brett Woods having ambitions to grow the Kerry Stokes-backed business.

The regulators would likely have stringent conditions on an ADNOC deal if it in fact offers clearance for it to happen at all.

They are likely to involve the guarantee of domestic gas supply or retaining a head office in Adelaide and reassurance around provisions for abandonment liabilities of projects.

Also, losing influence in PNG without Santos operating there could be an issue.

But some who earlier thought regulatory clearance would be likely gained are now not so sure, particularly given the involvement of private equity, with questions how willing The Carlyle Group may be to meet liability obligations.

Private equity firms owning key assets remains topical with the collapse of the country’s second largest private hospital operator, Healthscope, which was owned by Brookfield.

Sources say that the bidders have gained confidence they have met some regulatory hurdles with the FIRB.

Bidders last month submitted their indicative offer of $US5.76 per share, equating at the time to $8.89, a 28 per cent premium to the last closing price of $6.96.

Santos, which recommended the transaction, will be an Asia Pacific platform as part of a global LNG business as ADNOC diversifies away from the Middle East, subject to escalating geopolitical tensions.

From a capital spending perspective, the offer is well timed, because Santos is now most of the way through its capital spending work on its Barossa project off Australia’s northern coast and Pikka in Alaska.

Goldman Sachs, Rothschild & Co and J.B North & Co worked for Santos, while JPMorgan worked for the buyer.

The deal comes with further consolidation expected in an energy sector looking to capitalise on the elevated oil price at $US68.78 linked to Middle Eastern tensions.