santos is paying around $14 (7 dollars a barrel plus 7 dollars royalty)
Oil at $US80 a barrel looks bad for us consumers and great for producers like Santos: oil at $7 a barrel looks great for us consumers and especially good for Santos and its shareholders. Doesn't sound right though, does it? Well the sums are simple: Santos yesterday confirmed well-leaked stories that it was negotiating to tighten its grip on the Cooper Basin oil and gas fields of Central Australia.
Santos said that it will buy Delhi Petroleum Pty Ltd for $474 million, boosting its stake in the Cooper Basin to 87%, with Origin Energy holding the remaining 13%. Delhi holds 21%, Santos 66%.
Santos will add around 67 million barrels of oil equivalent to its reserves, worth more than $6 billion at current prices of more than A$100 a barrel.
But the sums are that Santos, by paying $474 million for those 67 million barrels, is buying them for just over $7 each: exploring and finding them would be more than that in every case, sometimes two to three times more expensive, given the ground and the location and the type of oil.
However there’s a royalty arrangement that Delhi had with the previous owners, Exxon, that was described as ‘heavy’ in some reports. Santos says it would start trying to renegotiate that but why would the US oil giant change a nice little earner, especially if it’s based on world prices?
This royalty will add to the basic $7.07 a barrel cost and could be quite onerous if it’s based on a final selling price. That information should be made public by management to shareholders.
The added benefit is that there are ready and steady markets for all the oil and gas produced from the Cooper Basin: it’s in stable Australia mostly or in known export markets. Brokers say the deal will add to earnings straight away and Santos will fund it wholly by debt.
It again confirmed why even at these very high market prices for crude, exploring the market makes a lot of sense if the right deal can be struck.
EBR Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
