UPDATE 2-Santos delays Gladstone LNG approval, raises equity

Fri Dec 17, 2010 12:43am EST

Related Topics

* Santos to raise A$500 million in equity funding

* Santos signs binding LNG deal with KOGAS, sells 15 pct stake

* Investment decision delayed by a month, first LNG pushed back

* Final investment decision delayed from December to January (Adds details on Santos announcement, analyst)

By Rebekah Kebede

PERTH, Dec 17 (Reuters) - Australian energy firm Santos has inked the last deals it needed to get its $16-billion Gladstone LNG project underway, but has pushed back the target for first gas exports by a year, to 2015.

Santos launched an equity raising on Friday for around A$500 million to fund its share of the coal seam gas-fed LNG export project in Queensland, clearing the way for a final investment decision in January.

The project would bring Australia one step closer to becoming the second-largest liquefied natural gas (LNG)producer by 2020 as producers try to meet growing demand from Asian buyers.

Santos also agreed to sell 15 percent of Gladstone to state-run Korea Gas Corp (KOGAS) and France's Total for A$665 million ($658 million)to reduce its share of the project to 30 percent, which will require it to make a $4.8 billion capital expenditure. [ID:nL3E6NG0AP]

"With 7 million tonnes per annum of LNG off-take now secured by binding agreements, GLNG is well and truly ready to go and the partners are working through the logistics for a final investment decision to be taken before the end of January," Santos Chief Executive David Knox said.

Although Santos has pushed back a final investment decision and delayed first LNG exports to 2015 from 2014, the certainty provided by the deals will be viewed as positive, analysts said.

"The big thing is, they are moving toward a final investment decision, they've got a two-train project, and there's a lot more certainty than we've had previously on that," said Mark Greenwood, an energy analyst at Citi in Sydney.

The 7.8 million tonne-per-annum (mtpa) project, an increase from the 7.2 mtpa previously expected, is expected to start exporting LNG in 2015, generating about $6 billion in estimated average gross revenue per annum for the 7 mtpa that Santos has sold under long-term contracts.

The finalization of a deal under which KOGAS will buy a stake in the project and commit to a long-term supply contract of 3.5 mtpa over 20 years will also be viewed as positive.

"The market wanted a high quality customer to validate the project and KOGAS is the largest LNG buyer in the world, it's a top tier buyer in Asia and they have done well to sign them up as a customer," Greenwood said.

The Gladstone project will boost Australia's current LNG production capacity by 35 percent, adding to an LNG export boom that is likely to bring production to at least 60 million mtpa by that year, according to the Australian Petroleum Production & Exploration Association Ltd (APPEA).

KOGAS will buy 7.5 percent of Gladstone from Santos and 7.5 percent from Malaysia's Petronas with Korean officials saying it would pay $610 million for the combined stake. In addition, Santos will also sell an additional 7.5 percent stake in the Gladstone to Total.

However, Standard & Poor's Rating Services said it had placed Santos on a negative credit watch, citing its vulnerability to adverse economic conditions, in particular exposure to volatilities in oil prices, during the next five years as it builds both GLNG and the PNG LNG project in Papua New Guinea.[ID:nWNA7301]

"It's not going to be risk-free, but they are doing what they can to cover themselves," said Adrian Wood, an analyst with Macquarie Equities Research in Sydney.

Trading of Santos shares was halted on the Australian bourse on Friday while Santos sells about 39.8 million shares in a fully underwritten offer at A$12.55 per share, below its last trade at A$12.97.

Santos said it now has all the funding for its share in Gladstone with A$3.9 billion in cash, A$665 billion coming from the Gladstone stake sale and A$500 million in the share issue.

Still, Santos said it would reduce its dividend, and would pay a final dividend of 15 cents after an interim dividend of 22 cents. ($1 = 1.011 Australian Dollars) (Reporting Rebekah Kebede in Perth and Meeyoung Cho in Seoul; Editing by Balazs Koranyi and Ed Davies)

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