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ConocoPhillips' latest asset sale could kick off major Australian M&A

ConocoPhillips' agreement to sell oil and gas assets in northern Australia for $1.39 billion not only advances the company's plan to focus on its North American foothold but could also kick off a wave of upstream M&A across Australia, analysts say.

"This will not be the last big deal in the Australian M&A scene, and we are confident there are more major transactions coming down the pipe. Watch this space," Wood Mackenzie senior analyst David Low said in an Oct. 13 note.

Australian producer Santos Ltd. said Oct. 13 it will buy ConocoPhillips' 37.5% interest in the Barossa project and Caldita field, 56.9% stake in the Darwin LNG facility and Bayu-Undan field, 40% interest in the Poseidon field and 50% stake in the Athena field.

ConocoPhillips' latest announcement follows several other large Australian M&A deals in the past year, including Santos's purchase of Quadrant Energy Australia Ltd. and Woodside Petroleum Ltd.'s acquisition of Exxon Mobil Corp.'s stake in the Scarborough natural gas field.

Many of the largest oil and gas companies are high grading their portfolios by selling off mature, noncore assets to focus and reallocate finances to more prolific projects and production regions around the globe.

In an Aug. 29 report from Wood Mackenzie, analysts said Italy's Eni SpA could be the next oil major to divest its Australian upstream portfolio, which is reliant on the Bayu-Undan field that feeds the Darwin LNG plant.

"The undeveloped gas assets, Evans Shoal and Blacktip, offer limited potential when Bayu-Undan ceases in 2022, and the Italian player may prefer to focus on more attractive opportunities in the Middle East and Mozambique," the August report said.

While shedding noncore assets around the globe, the Houston-based ConocoPhillips has been working to expand its footprint in North America, shoring up its presence in Alaska. In June, ConocoPhillips closed on the $400 million acquisition of 1.2 million acres of exploration land from Anadarko Petroleum Corp. and said in July that it could spend up to $6 billion to develop and maintain North Alaska crude oil production.

"We now expect the U.S. company to redeploy this capital [from Australia] into its North American unconventional and Alaskan positions. ConocoPhillips already allocates around 70% of its capital into its U.S. operations, so this sale, following recent Timor Sunrise and UK divestments, is firmly in line with its strategy of reducing international exposure and increasing North American output," Low said.

In April, ConocoPhillips closed the sale of its 30% stake in the Greater Sunrise Fields to the Timor-Leste government for $350 million, and in September, it completed the sale of its two U.K. subsidiaries to Chrysaor Holdings Ltd.'s Chrysaor E&P Ltd. for $2.68 billion.

Analysts from Tudor Pickering Holt & Co. said in an Oct. 14 note to clients that ConocoPhillips could use the proceeds from the Australian asset sale to bolster its "existing war chest and future free cash flow towards continuing to fund robust shareholder returns."

ConocoPhillips, which remains a favorite in the investment community, said Oct. 7 that despite ongoing energy price volatility, it would increase its quarterly dividend to 42 cents per share and plans to buy back $3 billion worth of its shares in 2020.

The dividend hike comes at a time when generalist investors have been reluctant to put their money into energy stocks due to sluggish oil prices, a focus on sustainability and capital discipline concerns amid declining cash flow.