Today’s Blog – Tuesday 14th February 2017

Editorial

A couple of recent events led us to ponder whether the perennial speculation that Santos Ltd (STO) might be a takeover target could have some firmer basis this year.  These were as follows:

  • STO’s GLNG partner, French Super-Major Total, announced its full year 2016 results last week – and announced that it had the fire power at present to acquire assets from weaker industry participants.
  • In December, STO participated in what seems to be a very large and well located gas discovery in the Highlands of PNG – Meruk-1.  This may well have multi-Tcf resources – which in our view could therefore change the expected order of future LNG developments in PNG.  The Highlands existing infrastructure and JV could successfully push for next 1 or 2 trains in the country to use their gas – leaving the Elk/Antelope resources that Total has part ownership of as long dated development options (and we don’t think LNG markets have room for both at this time).

Total taking out STO could therefore make sense for it given:

  • It would give it equity and influence in the PNG LNG JV – arguably the country is the hottest spot for global LNG at present.
  • It would give it operatorship of GLNG (and Total does not have a lot of direct operating LNG exposure, notwithstanding its multiple LNG asset positions around the world).
  • STO’s Northern Australian assets (DLNG and potential feedstock for that) could have synergies with Total’s position in the neighbouring Ichthys LNG project.
  • STO’s Cooper Basin assets provide back-up for GLNG.  The company’s WA gas assets could be run down or sold.  The remaining non-core assets are already effectively for sale.
  • Following various asset sales and recent strategy changes, STO is now an easier company for Total to value – and explain to its stakeholders what a takeover thereof would be all about.
  • STO’s only large shareholder – Chinese company ENN Group – does not seem to have established a happy relationship with STO’s Board – it could therefore readily decide to sell to Total, giving it a strong platform to make an overall bid.  STO’s Board would not have that many market friends.
  • A$5 a share could do it.  Politically a French takeover of STO should not be an issue in Australia.  This is not a hard deal to do.
  • The key issues for Total would be comparative value compared to other options open to it and the perception (rather than the reality) of a hostile takeover in a foreign jurisdiction being a difficult thing to do.

Commodity prices

Crude prices fell ~2% overnight – with Brent closing at US$55.56 and WTI at US$52.86.  In a familiar pattern from the last few weeks, the market seemed to absorb the bear-ish signals from Friday’s BHI US rig count over the weekend – and this was reinforced on Monday by an EIA report noting US production was increasing.

Henry Hub fell ~3% to close at US$2.94 – the first time the price has started with a “2” for 3 months.  US gas production has been peforming well in recent weeks – not only from the Marcellus – but also from the mighty Permian, reports over which typically focus on oil.  The Permian now hosts more than 300 rigs.

Governments

The debate over the lack of PRRT revenues being generated by Australia’s LNG projects may be hotting up (they don’t make much money!).   A call is emerging for the returns based PRRT regime to be replaced by a Federal royalty on revenues.  We seem to recall that when commodity prices were higher the “more taxes” lobby argued for the economically inefficient State royalties to be replaced with a returns focused tax….

And so it goes.

Company news – Miro Advisers

The Australian Financial Review (AFR) today reported the imminent closure of respected E&P advisory boutique firm, Miro.  Unfortunately this appeared to be due to the illness of its founder, Tim Woodall, whom we are sure the industry wishes the best of luck to.

The fact that this otherwise decent business could not be sold without its founder says a lot about the current tough times in the oil patch for principals and agents alike.

Company news – Origin Energy (ORG) and Woodside Petroleum (WPL)

ORG today announced that it had poached WPL’s CFO, Lawrie Tremaine.  The announcement unfortunately did not indicate why he was moving from a larger company to a smaller one where the pay would be less.

Perhaps WPL could ask its vaunted artificial intelligence program, Watson?

Company news – Cooper Energy

COE has just extended the contract of its CEO, David Maxwell, to mid 2019 – giving him time to shepherd first gas from the company’s Sole project offshore Victoria.

Quote of the day

The old London cabbie who told the following anecdote should maybe ask the same of WPL’s Watson:

“Only the other evening I picked up Bertrand Russell, and I said to him: ‘Well, Lord Russell, what’s it all about?’, and, do you know what, he couldn’t tell me.”

 

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