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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Is This Natural Gas Major About To Be Taken Over?

As Australia’s second largest independent gas producer continues to recover from years of financial doldrums, posting an impressive 433 percent surge in underlying profit in 2017 over the previous year. And now, it’s back in the spotlight as a potential takeover target.  

On Tuesday, Adelaide-based Santos, which produces about 163,000 barrels of oil and gas equivalent per day (boe), said that it opened its books to U.S.-based Harbour Energy Ltd., (which is backed by private equity group EIG Global Energy Partners). This comes after an August meeting where Santos rejected an A$4.55 billion offer from Harbour, stating at the time that the price was “inadequate and the sources of funds were uncertain.”

Harbour Energy CEO Linda Cook said yesterday she would seek to expand Santos in Asia and Africa. Harbour would also look to grow Santos’ gas assets in South Australia’s Cooper Basin, the ConocoPhillips-operated Darwin liquefied natural gas (LNG) project in the Northern Territory and in Papua New Guinea (PNG), Cook added. Santos granted Harbour due diligence after receiving the indicative proposal worth A$6.50 per share, amounting to A$13.5 billion (US$10.3 billion), on March 29, Santos said in a statement Tuesday.

Cook said in a phone interview Tuesday that: “We are big believers in the liquefied natural gas story. Our focus for Santos going forward would be in natural gas and LNG in particular.”

However, in a counter, Santos CEO Kevin Gallagher said “Santos’s strategy before anybody is taking us over is very much focused on Australia and Asia. There is no Africa. If Harbour Energy is focused on Africa, that’s really their strategy.” He added that Santos’ board will likely issue a recommendation to shareholders in the next two months. Unlike earlier takeover bids from Harbour and others, analysts see Harbour’s most recent offer as possibly coming to fruition.

Hurdles still remain

However, there are still hurdles to overcome.  A report in the Australian Financial Review said on Tuesday that the Australian Foreign Investment Review Board, whose approval process lingers over the situation, could take some months. Santos owns some significant gas infrastructure assets, and the government is sure to take a look at how a change of ownership could impact on the nation's interests, the report added.  There is also some concern about Harbour Energy's funding.

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Harbour will also have to convince regulators that if it is allowed to acquire Santos it will work harder to ensure the gas crisis affecting the Australian gas industry is alleviated. Massive amounts of Australian gas leaving the country’s shores in the form of LNG exports, has created gas shortages and pricing problems in parts of the county.

This most recent disclosure comes as Santos continues to shore up its financials after being bloodied in the 2014-2016 roil in global oil and gas markets that saw oil prices plunge from over $100 per barrel in mid-2014 to breaching the low $30s price point in early 2016.  LNG prices, for their part, also plunged during this time period to multi-year lows due to its historical linkage to oil prices and amid a growing supply glut of the super-cooled fuel. This supply glut also intersected a slowdown in LNG demand growth from Japan, the largest global LNG importer.

Moreover, while Santos was building its CAPEX intensive Gladstone LNG project and increasing debt levels, its shares on the Australian Stock Exchange (ASX) were plunging from a peak of A$13.23 per share to a low of just A$2.48 per share in 2016.

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In February, Gallagher said that an increase in global oil and gas prices had allowed Santos to slash costs as well as increase profitability, while generating significant free cash flow and reducing net debt. Santos saw its underlying profit reach US$336 million for 2017, a 433 percent surge year-on-year.

“Santos is now a stronger, more resilient company with the capacity to execute and bring on-line growth opportunities across its core long-life natural gas assets,” Gallagher added in February, while commenting on Santos’ Full 2017 Year Results.

By Tim Daiss for Oilprice.com

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