PNG M&A - Kumul to acquire 2.6% stake in PNG LNG from Santos

Today, 1st September 2023, it was announced that Santos and Kumul have signed a binding agreement for Kumul to acquire a 2.6% stake in the PNG project from Santos, with an option to acquire a further 2.4%. The deal value for the initial stake is US $576 million and the assumption of about $160 million of project finance debt (total US $736 million). The effective date of the transaction is 31 December 2022 and is conditional only on the approval of the PNG competition regulator. The option for the further 2.4% would be on the same effective date basis and would have a price of $524 million, plus a proportionate share of project finance debt.

This deal is essentially a replacement/restructuring of a deal announced in September 2022 for Kumul to acquire a 5% stake in the project which failed to close despite the offer period being extended twice, with the second extension period expiring yesterday. This original deal was for a 5% stake, effective 31 December 2022, with a deal value of US $1.4 billion, including a proportionate share of PNG LNG project finance debt of approximately US$0.3 billion. Therefore, this newly announced deal can be seen as simply splitting the previous deal into two, with slightly over 50% announced today and the remainder as an option.

PNG LNG project

The PNG LNG project covers the PNG LNG liquefaction plant near Port Moresby together with a number of fields in the PNG highlands and the infrastructure to process and transport the gas to the liquefaction plant.

Prior to this deal, the PNG LNG JV partners were ExxonMobil (33.2% + operator), Santos (42.5%), Kumul Petroleum (16.8%), JX Nippon (4.7%) and Mineral Resources Development Company Limited (MRDC, 2.8%). On completion of this deal, Santos' interest will decrease to 39.9% and Kumul's interest will increase to 19.4%.

The feedstock for the LNG project comes from a number of onshore fields, with new field developments required to maintain production levels. The chart below is a feedstock outlook generated by Gaffney Cline as a part of the Scheme Booklet that was released as a part of the Santos-Oil Search merger and dated 11 November 2021.

Santos motivation

Santos, through their merger with Oil Search in December 2021, found themselves as the largest stakeholder in PNG LNG with a 42.5% interest. Santos had previously held 13.5% of the project and Oil Search 29%. It was always likely that they would look to divest some of this large position.

Given the current state of the LNG market, this sale should achieve a good price. Giving Santos some immediate cash-flow whilst still leaving them with a strong position in the project. Santos are executing a number of capital-intensive growth projects including Barossa, Moomba CCS and Dorado, which are experiencing cost overruns and delays. Santos recently announced that the costs for Moomba CCS had increased by 35% (from US$165 million to US$220 million) and they are experiencing delays (and likely cost increases) at Barossa owing to legal challenges. Cost concerns were also stated as the reason behind Santos delaying FID on Dorado.

I can certainly see Santos looking at the option of a further farm-down once this deal is complete but they may not achieve the same price level: this deal gives a value of US $22 billion for 100% of the asset, or about US $8.8 billion for Santos' remaining 39.9% stake.

Kumul Petroleum motivation

Kumul taking a larger stake in the county's flagship LNG project seems like a logical step. They would have preferred to have taken the full 5% but struggled to secure funding owing to the shifts in capital markets.