PNG LNG assets pose questions to Santos suitors ADNOC and Carlyle Group

ADNOC and Carlyle Group are expected to submit a binding offer for Santos in the coming weeks.

Santos suitors are expected to submit a binding offer for the Australian listed energy group next month, say sources, but there’s talk that due diligence has thrown up some surprises for bidders Abu Dhabi National Oil Company and The Carlyle Group.

ADNOC and Carlyle offered $30bn for Santos last month and have been carrying out due diligence in a deal that would require government approval.

Sources say that the bidders have already cleared some regulatory hurdles with the Foreign Investment Review Board, but there’s a view that the government blocking a sovereign wealth fund owning one of the country’s largest gas producers is a big risk.

DataRoom understands that in focus for ADNOC and Carlyle has been the Santos PNG assets, which generate close to half of Santos revenue.

While PNG LNG is a good business, due diligence may have shown earnings not to be as high as the bidders initially anticipated, and gaining funding for PNG assets is challenging.

PNG LNG’s future capital spending needs may also have been higher than expected.

There are also question marks as to whether provisions for abandonment liabilities for Western Australia assets were lower than the bidders themselves estimate.

Yet bidders may have allowed for this before they 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.

This week oil project developer Carnarvon Energy purchased a 19.9 per cent stake in Perth Basin developer Strike Energy.

DataRoom has since learned that late last year Amplitude Energy was also in talks about being part of a three-way merger deal, despite the plans not eventuating.

Amplitude Energy, formerly Cooper Energy, has top operative Jane Norman in charge.

With Ms Norman as chief executive and ex-Senex boss Ian Davies now chairman, most do not expect such seasoned industry operatives to be sitting on their hands and deals to transform the business into a larger player will be on the agenda.