How an $8.4 Billion Takeover Could Save Noble
(Bloomberg Gadfly) -- How does a company with $262 million in the bank and looming restructuring talks with creditors carry out an $8.4 billion takeover?
Ask Noble Group Ltd. Harbour Energy Ltd., an investment vehicle in which Noble had a 75 percent stake in January, is due to present a deal within weeks offering about that much for oil and gas producer Santos Ltd., the Australian Financial Review reported Thursday without saying where it got the information.
Santos later said it had rebuffed an approach in August valuing it at around A$9.5 billion ($7.2 billion) because the price was inadequate and the source of funds uncertain.
The prospect of a deal matters not only because it could end the agony for one of the more prominent casualties of the natural-gas bust. It could also offer Noble a narrow path out of its own debt problems.
Santos was worth as much as A$15 billion in 2013, when Asian natural gas prices were riding high and Australia's economy ran hot. Since then, things have been looking tougher: The Gladstone LNG gas-export plant in which Santos is the lead investor cost $18.5 billion to build and shipped its first cargo two years ago, but isn't expected to reach 77 percent capacity utilization -- a level which should be considered a bare minimum -- until the end of 2019. LNG still doesn't account for much more than a third of revenue, and Ebit has covered interest costs in just two of the past six half-years.
More recently, though, the outlook for Santos has been improving. Free cash flow broke into positive territory for the first time in seven years in 2016 as capital spending shrank. With Australian domestic gas prices surging and no plans by Santos to get back into the LNG plant-building game, the future looks brighter.
The question then becomes what such a deal could mean for Noble. Clearly, the commodity trader can't fund 75 percent of an $8.4 billion takeover, or anything very much except for its own debt repayments. However, it's unlikely to have quite as large a stake in Harbour now.
Assuming Noble's $150 million initial investment in Harbour, in 2014, was diluted in proportion to Harbour's $1 billion contribution to the $3 billion takeover of some of Royal Dutch Shell Plc's North Sea assets that it completed earlier this month, the interest has probably been boiled down to around 15 percent. Even if it was Harbour itself rather than some of its associated debt-funded vehicles stumping up the cash for a Santos deal, Noble has an easy way out of any extra spending commitment by simply allowing new investors to dilute it further.
That doesn't mean there's no benefit in a transaction. A year ago, Noble's original investment in Harbour hadn't yielded much fruit. Thanks to the dealmaking nous of Harbour's principal Linda Cook, it's now been delivered an (admittedly small) stake in the Shell business, yielding 115,000 barrels a day of oil in 2016, rising to 118,000 barrels a day in the first half of 2017.
Add Santos and you're not far short of 300,000 barrels of oil equivalent a day, which would put Harbour in the company of mid-sized oil and gas producers such as Woodside Petroleum Ltd., Pioneer Natural Resources Co., Hess Corp. and Noble Energy Inc. (no relation).
That's worth something. It's not so long ago that Harbour was little more than an idea and a well-respected management team. Now it may become a significant energy company. With an index of S&P 500 oil and gas producers up 13 percent over the past three months, even a sliver of such a business might be a way to pay some of Noble's looming debt maturities. And not a minute too soon, either.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
Chrysaor Holdings Ltd., which carried out the transaction, did so with an investment of up to billion from Harbour Energy, plus a billion bank loan backed by the value of the acquired oil reserves and junior debt financing from Shell, according to the latest annual report of its main vehicle Chrysaor Ltd.
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