Chinese private gas distributor ENN Group is set to move into the upstream sector through the $750 million purchase of an 11.7% stake in Australian oil and gas producer Santos from investment fund Hony Capital, the companies said Thursday.
Under the terms of the deal, which left analysts wondering whether a full takeover offer for Santos was on the cards, Hony Capital has also agreed to become a major shareholder in ENN, taking a placement of the Chinese company's A shares worth $380 million.
"We believe that ENN are dipping their toe in the water and could well come back for a full-blown takeover of Santos," Hong Kong-based Bernstein Research analyst Neil Beveridge said in a note.
ENN is paying A$4.80 ($3.64)/share for the Santos stake, representing a 22% premium to the company's closing price Wednesday of A$3.92/share.
"Given that ENN are not an NOC, such a move would be less politically sensitive than if the acquisition was made by a Chinese oil major. Whether Australian regulators would see the distinction is less clear," Beveridge said.
"While Santos are not the force they were a decade ago and less strategic given the growth in Australian LNG there would likely be significant regulatory uncertainty as to whether such a transaction could be approved given the strategic nature of Santos gas infrastructure. The outcome of any takeover attempt by a Chinese entity is in short highly uncertain," he concluded.
Beveridge drew a parallel between a move by ENN on Santos with the 1980s creation of BG Group as an integrated gas value chain player, spanning distribution, LNG and upstream operations. GROWING SALES IN CHINA
ENN's natural gas sales volume grew by 47% over the period from 2001 to 2015 and the company is now China's largest private natural gas distributor.
The company sold 11.3 Bcm of natural gas in 2015, supplying more than 12 million households in 152 Chinese cities and 56,000 industrial and commercial users. ENN operates a network of 576 LNG and compressed natural gas refueling stations.
It distributes 1.88 million mt/year of LNG, accounting for about 20% of the LNG traded in China.
The company is also building China's first private LNG receiving terminal at Zhoushan in Zhejiang province.
The facility will have a capacity of 3 million mt/year when phase one is completed in 2018, with scope for further expansion.
"The proposed acquisition [of the Santos stake] is an exciting move for ENN," said the group's chairman Wang Yusuo.
"This introduction to the upstream sector takes us a step forward in our aim to generate value across the entire natural gas value chain, and allows us to learn and build experience. Equally importantly, we are gaining a strategic investor and partner in Hony Capital whose deep China experience and global outlook can help us accelerate future growth overseas."
Hony Capital acquired most of its stake in Santos in November 2015 when it raised its interest in the Adelaide-based company from 1.4% to 7.9% via an A$500 million share placement.
Hony Capital's investors include Legend Holdings, the Chinese Academy of Sciences Holdings, the National Social Security Fund, China Life Insurance, Goldman Sachs, Temasek, and European and US pension funds.
OPPORTUNITIES FOR SANTOS IN CHINA
Hony Chairman John Zhao said his company had chosen to invest in Santos because of its strategic position in Australia and synergies with the growing China energy market.
"Bringing in ENN as a strategic investor will help Santos connect to that opportunity in China, and at the same time we are helping a Chinese company expand internationally," Zhao said. He added that after becoming a major shareholder in ENN, Hony would "continue to support its national and international growth."
ENN earlier this month signed a heads of agreement to take 500,000 mt/year of LNG over five years from Origin Energy, part owner of the new Australia Pacific LNG project in Queensland.
Prior to that, ENN inked agreements to buy 500,000 mt/year of LNG each from French major Total and from Chevron's Gorgon project in Western Australia, which shipped its first cargo earlier this week.
All three purchase contracts are set to begin in 2018 or early 2019, after the Zhoushan terminal starts operations.
Santos is Australia's second-largest listed oil and gas producer, behind Woodside Petroleum. The company produced 57.7 million barrels of oil equivalent in 2014, up 7% from 54.1 million boe in 2014, and expects to pump between 57 million and 63 million boe in 2016.
STOCK MARKET JITTERS
Santos is an emerging LNG producer, having started up its $18.5 billion Gladstone coalseam gas-to-LNG project in Queensland last September. The company owns 30% of the 7.8 million mt/year GLNG project, where the second train is expected to begin shipments shortly.
GLNG is Santos' first operated LNG project, and adds to a portfolio which includes 13.5% of ExxonMobil's PNG LNG and 11.5% of ConocoPhillips' Darwin LNG. The company's other core operations are its oil and gas assets in central Australia's onshore Cooper Basin.
Santos has had a torrid time in the share market over recent years, however, due to market jitters about its liquidity in the wake of the crash in crude oil prices.
The company was trading at more than A$15/share in September 2014, but had dipped below A$4/share a year later.
Last October, Santos attracted a A$6.88/share takeover offer from Bermuda-based investment fund Scepter Partners.
That offer was rejected in favor of a A$3.5 billion debt reduction package which included asset sales and the equity raising with Hony.
The rejected offer looks extremely generous given Santos shares have since dropped below A$3 each.
The company closed at a low of A$2.48/share on January 20, before rebounding to current levels.
According to Beveridge, the most obvious attraction in a full takeover of Santos for ENN would be using the Australian company's tight gas and coalseam gas experience in China.
A tie-up between the two companies could enable ENN to launch a push into upstream in China, leveraging Santos' capabilities, he said.
