Santos goes from prey to predator with $2.2b deal

After rejecting Harbour Energy's $10.8 bid earlier this year, Santos's management has had a point to prove to shareholders. The purchase of Quadrant Energy does just that.

Australian oil and gas producer Santos showed it had emerged from survival mode with a flourish, by inking an agreement to buy West Australia-based Quadrant Energy for $2.15 billion. 

The deal includes a contingent payment in relation to the recent significant Dorado-1 oil discovery and a royalty over all other future hydrocarbons produced in Quadrant’s Bedout Basin tenements, the companies said in a statement on Thursday.

Santos is paying a slight premium to consultancy Wood Mackenzie's valuation of Quadrant Energy's production portfolio, but the Dorado discovery offers material value upside on the deal.

Key drivers for Santos include rebalancing its portfolio towards lower cost, conventional oil and gas assets, strengthening its position around gas production hubs in Western Australia and boosting the company's near-term cash flow, said WoodMac senior analyst Daniel Toleman.

The deal also emphasises the importance of Australia to Santos following the divestment of assets in Southeast Asia.

In addition, the Dorado discovery offers considerable exploration upside and medium-term oil production growth. “Santos has moved fast to lock in the dominant position in this exciting emerging play at an attractive price,” said Toleman.

Certainly a marked change in fortunes since it was fending off a nearly A$7 per share offer from private equity-backed Harbour Energy earlier this year. 

The deal marks a look-awaited pay day for Quadrant Energy's owners including Brookfield Business Partners, Macquarie Capital, Wesfarmers, AMB Holdings and Quadrant management.

The price tag is in line with the $2.1 billion paid to Apache in 2015 for the assets that were rolled into Quadrant.

WoodMac estimated Quadrant Energy has generated around $1 billion in free cash flow in the intervening period, with the Dorado contingency payments offering additional upside to the deal.
Clayton Utz is the lead legal adviser to Brookfield and Macquarie on the transaction. Macquarie Capital is financial adviser to Brookfield, with King & Wood Mallesons and Allens providing additional legal advice on the transaction. Goldman Sachs and Citi are the financial advisers to Brookfield.

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