Column-Brighter LNG and oil prices, wary public threaten
Harbour's Santos deal: Russell
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[April 09, 2018]
By Clyde Russell
Reuters - The revised $10.4 billion bid by
Harbour Energy for Australian liquefied natural gas (LNG) producer
Santos Ltd STO.AX looks at first glance like a winning hand, but it's
still probably got the odds stacked against it.
The U.S. private equity firm's fourth bite at the Santos cherry since
August last year values the Adelaide-based company at a 28 percent
premium to the close on April 2, and is 43 percent higher than the first
attempt. (Full Story)
Recognising that this is a serious bid, Santos' board has decided to
"engage further with Harbour", the company said in a statement to
shareholders.
This is sensible, but shareholders should consider whether they want to
sell out just as Santos is finally starting to reap the benefits of its
investments, and the prospects for further improvement are getting
brighter.
The Harbour offer values Santos at A$6.50 a share, a level the company
last traded at in July 2015, at a time when the price of LNG and crude
oil was falling, putting the company under pressure just as its massive
Gladstone LNG plant in Australia's Queensland state was starting up.
When Santos was last at A$6.50 a share, Brent crude oil LCOc1 was around
$58 a barrel and the spot price of Asian LNG was about $7.80 per million
British thermal units (mmBtu).
These prices matter for the bid as the bulk of Santos' revenue is either
in oil-linked longer-term LNG contracts, spot LNG prices, or in crude
for the company's small oil output.
Brent crude ended last week at $67.74 a barrel and spot LNG was about $7
per mmBtu, although it's worth bearing in mind that LNG prices typically
are weakest during the shoulder seasons between the winter and summer
peak demand periods.
Spot LNG prices surged to $11.50 per mmBtu in early January, the highest
in more than three years, as China bought additional cargoes to meet
winter demand.
While future spot LNG prices are uncertain, the chances are that China
will continue to boost its imports as part of efforts to reduce the use
of polluting coal for winter heating.
On crude oil, the success of the Organization of the Petroleum Exporting
Countries (OPEC) and its allies in draining global inventories and
boosting prices has led to a market consensus that prices are more
likely to rise than fall over the medium term.
This means that Santos is likely to receive higher revenues for its LNG
from the Gladstone plant and its share in LNG operations in Darwin and
Papua New Guinea, as well as for its domestic natural gas and oil output
in Australia.
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It's these revenue streams that Harbour Energy is eyeing, and it must be taking
the view that Santos' share price has yet to reflect the brighter medium and
longer term outlook.
For this reason the revised offer may not quite be enough, especially if Santos'
existing major shareholders and the analysts they rely on start to re-rate the
stock in line with expectations for higher crude and LNG prices.
To view a graphic on Spot Asian LNG price vs. Santos share price, click:
https://tmsnrt.rs/2IzAAUD
CONVINCING WARY POLITICIANS, PUBLIC
The Santos share price did kick higher on the new Harbour Energy bid, jumping
more than 5 percent after the revised offer, but at its close of A$5.88 on April
6, it's still some way below the indicative value of the offer.
Rather than reflect that Harbour Energy is overpaying, this likely shows that
investors don't believe the bid will clear the regulatory hurdles in its way.
The deal will be subject to Australia's Foreign Investment Review Board, which
may have concerns about a key domestic oil and gas producer falling into foreign
hands.
Even if the board does greenlight the deal, the chances are that the Liberal
Party-led federal government of Prime Minister Malcolm Turnbull will decline
final approval.
Domestic energy policy is a hot button issue in Australia, with consumers and
industry angry and disillusioned at sharply rising prices for electricity and
natural gas.
Any suggestion that a private equity company buying Santos would somehow be bad
for consumers and industry would put tremendous pressure on a government that is
trailing the opposition Labor Party in opinion polls.
And it wouldn't be hard to make such an argument as it's likely that Harbour
Energy is focused on the LNG jewels in the Santos crown and not that interested
in developing domestic natural gas supply.
Also, a debt-laden deal carries the risk of massive cost-cutting, with related
job losses, another issue that would be exceedingly touchy in Adelaide, a city
still reeling from the loss of Australia's motor car assembly plants.
These factors make it unlikely that Harbour Energy's offer will get over the
line, at least in its current form.
It's possible that it could win political approval, if Harbour Energy agrees to
whatever conditions are placed on the deal, but it's also possible that Santos'
shareholders may want the offer sweetened a little more.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(Editing by Richard Pullin; clyde.russell@thomsonreuters.com )
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