Today’s Blog – Friday 23rd October 2015

Please pass on this blog to others you think may like to read it

Readers – please note that blog services next week will be intermittent due to your blogster travelling

Introduction

As elaborated upon below, there is plenty happening in the corporate part of the Australian oil patch at present, with hostile takeover offers, mergers, etc, emerging by the day.

Your blogster was once educated in economics and was taught that markets were efficient and rational.  However, long experience has in fact indicated that, although markets will tend towards efficiency in the long run, in the short term they are hot-beds of irrationality and the playpens of complex and very human psychologies.

This is no better illustrated than by what are called the “social issues” in any take-over scenario – i.e. what outcomes will the deal mean for key decision-makers such as CEOs, Chairmen and other Directors.  Social issues are often as important in determining what happens as do economics.

We look at this in a couple of specific recent deals below.

Commodity prices

It was a fairly uneventful day for crude prices yesterday, with Brent closing up slightly at US$48.08 and WTI doing a little bit better at US$45.49.  No numbers or events gave market direction on the day.

The Henry Hub natural gas price continued to fall, closing at an ugly US$2.37.  Come on Cheniere – get those trains a-liquefying!

LNG and international gas

JERA, the Japanese LNG buying joint venture between Tepco and Chubu, which is set to overtake Kogas as the world’s largest LNG buyer, has been reported by Reuters as saying it will fundamentally change its LNG contracting strategy when its current long term contracts start to expire over the next few years.

Its new strategy will be to enter into as small as possible a base of long term contracts, and then build a structure of much shorter term and spot contracts on top of that.

New LNG projects will likely have to change their multi-decade funding paradigm if other buyers follow suit.  In theory that should not be a problem – as e.g. multi-billion dollar oil developments are financed without having long term contracts – but in practice the adjustment may not be seamless.

Recent news from Russia’s troubled Yamal LNG project supports this blog’s thesis that Russian plans to replace Western finance with Chinese money will not be plain sailing.  Not surprisingly, the putative Chinese financiers for Yamal are seeking onerous terms that the Russians are currently baulking at.

I expect similar differences of opinion over Chinese funding for the Russia-to-China gas pipelines.

Governments and fracking

The drum-beat of genuine technical views that waste-water injection in the US is causally linked to higher seismic activity continues, with the USGS issuing a recent paper with that conclusion.

The very seismically stable Australian continent is not Oklahoma – but the industry here will no doubt have to carefully manage the likely seizing upon of this issue by anti-fossil fuel groups.

Company news – Santos (STO)

Further details have emerged over the Middle Eastern backed Scepter Partners who recently proposed a take-over to STO’s Board – which was rejected yesterday.

Media investigations suggest the group is real and well backed.  In Australia it has assembled a top-tier group of professional advisers – and most interestingly has disclosed that former STO CEO John Ellice-Flint would become Executive Chairman of the company.

The market appears sceptical at this point – with STO’s share price trading below the spurned offer.  In my view, an increase in the offer of say A$1 would go a long way towards closing a deal.

Sceptre’s only real conditionality will be FIRB approval – and given what has emerged over its team and strategy to date, that should be eminently manageable.  STO has no strategic shareholders and a cash offer at a reasonable premium should close a deal.

We note that Scepter’s adviser, Highbury Partners, has experience in BG’s on-market takeover of QGC.  An on market take-over offer for STO of say A$8/share should get >50% and victory.

Lets look at the social issues:

  • STO has no ongoing CEO looking to protect his job.
  • STO’s Chairman is arguably not looking for a long term position either – Glencore is more important to him.
  • Scepter has a personal link to STO’s Chairman – one of its key Directors was on the Board of Xstrata with him. This should give some personal insights – but may also be the source of personal rivalries.
  • None of STO’s directors have meaningful equity positions in the company (unlike John Ellice-Flint).
  • Given these, this should be an easier deal to close than one where the personal agendas at the target were stronger and those at the predator weaker.

Company news – Beach Energy (BPT) and Drillsearch Energy (DLS)

Finally!  After many months of expectations, BPT and DLS have announced a friendly deal (which they call a “merger” – legally there is no such thing) under which BPT will take over DLS.  The currency for the deal will be BPT scrip and the mechanism a scheme of arrangement.  This will take many months to close – February next year has been flagged – but seems unlikely to be rejected by shareholders or trumped by others.

The social issues here are:

  • BPT only has an acting CEO whilst DLS’s CEO is only recently appointed (and is not on the Board).  The usual CEO ego factor is therefore diminished.
  • DLS’s Chairman and another key DLS Director have been promised Board seats on BPT (two BPT Directors will retire – which is arguably timely anyway).
  • BPT’s CEO search process will now likely also include assessing the merits of DLS’s CEO for the job.
  • Accordingly, the deal structure has lubricated away some typical social issue sticking points.

Quote of the day

Australian readers may be surprised to learn that some angst exists in Scotland over the errant refereeing at last weekend’s Rugby clash between the nations. That angst brings to mind the following P G Wodehouse quote:

“It has never been hard to tell the difference between a Scotsman with a grievance and a ray of sunshine”.

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