STO Santos Limited

   By Robb M. Stewart 
 

MELBOURNE, Australia--Chinese natural-gas distributor ENN Group Co. and private-equity firm Hony Capital will leverage their joint stake in Santos Ltd. (STO.AU) to invest in gas reserves and production in Australia and Papua New Guinea.

The companies signed a strategic partnership aimed at assisting Santos and using the mid-sized Australian energy company to invest in gas fields and exports of liquefied natural gas, they said in a statement Tuesday.

ENN and Hony snapped up more shares in Santos in May, lifting their collective stake to 15.1%, and agreed to act in concert as shareholders when it came to voting and other decisions. That built on ENN's position as the largest single shareholder in a company with a basket of natural-gas assets that supply customers in Australia and Asia.

The formalized relationship will effectively link the upstream exploration and production abilities of Santos with China's fast-growing downstream market for natural gas, ENN Chairman Wang Yusuo said.

ENN and Hony intend to use Santos as their primary investment vehicle for material investment in Australia and Papua New Guinea, while Santos would seek to include the pair in investment opportunities where it was in the interest of all its shareholders, the companies said.

As part of the agreement, Eugene Shi, vice president of ENN Ecological Holdings Ltd. (600803.SH) will join Santos's board as a nonexecutive director and would accept the secondment of one or two ENN employees a year into its upstream LNG production operations as part of a training program.

ENN and Hony would in turn support Santos, agreeing to consider future capital raisings, opportunities for co-investment in acquisitions and expansion, and also by proposing opportunities for Santos to increase its access to China, according to a copy of the agreement released by Santos.

Santos rode Australia's oil-and-gas investment boom aggressively, pouring billions of dollars in new projects from Australia's east coast to new developments in Papua New Guinea. But it was hit hard by the slump in oil prices, forcing it to offer assets for sale as it sought to shore up a stretched balance sheet. In late 2015, it rejected as too low a takeover offer from a private-equity firm backed by sovereign investors and wealthy members of Asian and Gulf-based ruling families.

Kevin Gallagher, who took over as managing director and chief executive in early 2016, has tied Santos's future to the GLNG gas-export operation in east Australia that counts Total SA (TOT) among its partners, the Exxon Mobil Corp.-led (XOM) PNG LNG operation in Papua New Guinea and projects in northern Australia, Western Australia, and the Cooper Basin straddling South Australia and Queensland states. Last December, he moved to bundle noncore operations to be run as a separate business and targeted a further US$1.5 billion drop in debt to less than US$3 billion by the end of 2019.

In November, Hony bought the equivalent of an about 2.25% stake in Santos, roughly eight months after it sold an 11.7% stake that it had built up to ENN's ENN Ecological Holdings.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

June 26, 2017 20:53 ET (00:53 GMT)

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