Total agreed to buy the upstream liquefied natural gas assets of Engie for an enterprise value of $1.49bn, making the French oil major the second-largest player in the global LNG market.
The deal “enables Total to accelerate the implementation of its strategy to integrate along the full gas value chain, in an LNG market growing strongly,” chief executive officer Patrick Pouyanne said in a statement on Wednesday. “Total will also become an integrated player in the US LNG market.”
The deal is part of Total’s plan to increase market share as it expects demand for the fuel in Europe and Asia to grow over the next decade. The sale also marks a further step in Engie’s three-year plan to sell €15bn ($17bn) of assets that are exposed to commodity and electricity-price swings.
The acquisition includes interests in liquefaction plants, notably the Cameron project in the US, long-term LNG sales and purchase agreements, a tanker fleet, and access to regasification facilities in Europe, Total said in a statement. It will help more than double the company’s LNG production to 23mn tonnes in 2020, from 11mn tonnes last year, while annual trading volumes would quadruple to 28mn tonnes.
Royal Dutch Shell, the largest non-state LNG trader and producer, had 30.9mn tonnes of gas liquefaction capacity in 2016, according to its annual report. The company sold 57.1mn tonnes of the super-chilled fuel last year.
“This market is becoming commoditised,” Pouyanne said on a call with reporters. “So size matters.”
Benchmark LNG prices in Asia have fallen in recent years due to growing supply of the fuel, which is used in power plants from Japan to South Korea and China.
The unit “has been durably under pressure” because of low prices and “we don’t expect an improvement short term,” Engie CEO Isabelle Kocher said on a conference call.
Total could have to make as much as $550mn of additional payments to Engie if oil markets improve in the coming years, according to the statement. The so-called earn out would be paid in from 2020 to 2021, Engie chief financial officer Judith Hartmann said in an interview with Bloomberg Radio.
The LNG unit’s debt and liabilities will be deducted at the closing of the deal, meaning the total cash price paid by Total will ultimately be lower than $1.49bn, Pouyanne said. The transaction should close by mid-2018, subject to consultation with employee representatives, regulators and partners on certain contracts, Total said.
Total will benefit in coming years from the start up of LNG projects in Russia and Australia. It’s also studying an extension of a facility in Nigeria and a new plant in Papua New Guinea. Earlier this year, the company bought a 23% stake in Tellurian Investments Inc, which plans a liquefaction project in the US
Engie, based in Courbevoie near Paris, is reinvesting the proceeds of its asset sales in clean power, energy-efficiency services and regulated gas and electricity networks, where it sees more predictable growth.
The deal will help cut its net debt by $1.4bn, the utility said in a statement. Engie has now achieved 83% of its €15bn divestment target for the 2016 to 2018 period, it said.
The sale of upstream LNG “will mostly be welcomed by the market, given the better-than-expected price tag,” Vincent Ayral, an analyst at JPMorgan Chase & Co, wrote in a note yesterday.