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Santos and Drillsearch to cash in on partnership

Energy exploration and production is one of very few industries where partnerships and collaboration for mutual benefit are common practice.

The latest partnership between Santos (ASX: STO) and Drillsearch Energy (ASX: DLS) is a great example of energy industry collaboration. The two companies last week announced several new long-term deals including shared ownership of exploration blocks and a long-term gas sales agreement that should benefit both companies.

The first deal will see Santos ‘earn’ a 60% interest and operatorship of Drillsearch’s Western Cooper Wet Gas Project by funding a $75 million exploration and appraisal program in one block, and a $45 million program in a second block that will include the drilling of six exploration wells.

The two blocks contain prospective wet gas resources of over 100 billion cubic feet (bcf). Santos will also provide development assistance in the construction of surface production facilities to export the output. This is of significant benefit to Drillsearch, reducing the risk of having to secure additional funding, and lets it leverage Santos’s existing expertise.

The second deal, a long-term gas sale agreement, will let Drillsearch secure a buyer for future gas production and set Santos up with a new source of supply for growing domestic LNG demand.

In the company’s ASX release, Drillsearch Managing Director Brad Lingo noted that as operator and joint venture partner in the Western Cooper Wet Gas Project, Santos will help to “materially accelerate the development of both conventional and unconventional wet gas resources” in the blocks.

Shareholders of both companies will win as a result and it builds on an already productive relationship between the two companies. Shares in Drillsearch surged 6% to $1.24 on the news, while Santos climbed 1.9%.

Foolish takeaway

The deals between Santos and Drillsearch are well designed to share expertise and maximise the return of each company’s assets. The partnership will result in Santos getting a new source of gas to take advantage of the significant growth in demand from both Asia and Australia’s East Coast, while Drillsearch gains certainty over cashflows — a brilliant result for shareholders in both companies.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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