Santos (ASX:STO) has confirmed that it has received a US$1.4 billion offer from Papua New Guinea’s (PNG’s) national oil company Kumul Petroleum to acquire a 5% interest in the ExxonMobil-operated PNG LNG export complex from the Australian company. Crucially, the deal, if it goes through, will help Santos’ strategic about face towards oil in Alaska.
Santos has been seeking to sell down its majority share in PNG LNG for some time. Indeed, it is looking to raise much-needed cash after it recently surprised the market with its decision to develop the Pikka oil project in Alaska, expected to pump 80,000 barrels per day starting 2026.
Santos reported yesterday that it has received a binding conditional offer from Kumul with a US$55 million deposit for part payment if Santos accepts the offer.
The deal “is conditional on Kumul obtaining the waivers of certain pre-emptive rights by each other PNG LNG project participant under the project operating agreement to allow the transaction to proceed,” said Santos.
After the acquisition, the PNG state would own 22% of PNG LNG, while Santos’ shareholding would drop to 37.5%. Still, it would remain the biggest investor in the project. ExxonMobil (NYSE:XOM) operates the project with a 33% stake. Other partners include a unit of Japan’s JX Holdings, and PNG state-owned Mineral Resources Development Company.
“What isn’t clear is how PNG Government-owned Kumul will pay for its stake, which may still present some risk to the deal,” Credit Suisse analyst Saul Kavonic said in client note, adding that the government could seek funding from banks, governments or the LNG industry, reported Reuters.
The potential sale would help achieve the government’s objectives for the people of PNG to have a greater equity interest in the development of their natural resources.
Santos CEO Kevin Gallagher said the potential sale to Kumul represents an opportunity to build strategic alignment for the future development of PNG’s natural gas resources, including via PNG LNG infrastructure.
As part of the proposed transaction, Santos and Kumul will negotiate a heads of agreement to further collaborate on the development of Kumul’s regional capacity and capability, including carbon emission reduction opportunities to achieve net-zero operations, noted Santos.
Santos was targeting to raise up to $3 billion from asset sales this year but failed to find a buyer for its share in the Pikka oil project in Alaska and deferred selling equity in the Dorado oil and gas project off Western Australia while it revises development plans.
Santos Strategy Out of Touch with Global Investors
Credit Suisse said in a report last month that Santos was “selling the jewel to fund Alaska” and raised concerns about execution risk for Pikka as Santos “has never successfully never built a large project, let alone two concurrently, or in challenging Alaska.”
Balance sheet risks for PNG and Dorado remain unclear, added the bank.
The “strategic about-face is ‘out of touch’ as global investors appear to be favouring gas over oil, short cycle over long life, ESG optics, shareholder returns over growth and sticking to core competencies. Selling LNG and deferring Dorado to pursue Alaska steers against these trends,” noted Credit Suisse.
Santos “reputation for beating expectations has eroded”, in the bank’s view. “Abandoning the selldown target, and associated capital management, and the move into Alaska are a noticeable departure from expectations. Santos spent years emphasising it would stick to key PNG and Australia footprints where it adds value, rather than branch out as it has now. Santos claims the world has changed, but the actual change we see here is to Santos’ selldown plans, which couldn’t be realised, forcing a new strategy that wasn’t originally planned for.”
“The change in Santos’ tone and strategy may tarnish credibility and risks deterring new investors, we believe. That said, the CEO has the record to back himself and perhaps market perception of Alaska will evolve and improve in time,” added the bank.