As Santos shares trade around the $6.20 level, there’s no doubt investors are starting to wonder how exactly the company was justified in turning down Harbour Energy’s bid recently.
The stock has slipped from the $6.44 level where it was trading when the Santos board rejected Harbour’s $US5.21 (about $7 at the time) a share offer in May. The offer valued Santos at $14.5 billion, but it was not enough to win the support of the board led by chairman Keith Spence. Investors now want to know what plans the board has to support its future growth, not just in production volumes but also the share price.
Santos said last week that production was 5.1 per cent lower for the first six months of the year at 28 million barrels of oil equivalent, although it rebounded 2.9 per cent in the second quarter as the PNG LNG gas export operation in Papua New Guinea resumed output after the quake and aftershocks that struck the country in February.
Despite the lost output from ExxonMobil’s PNG LNG plant, in which Santos has a stake, the company said revenue for the six months rose by 16 per cent to $US1.68 billion ($2.27bn) thanks to a 37 per cent jump in the average realised oil price as well as an increase in oil sales for the period. Following the results, JPMorgan has raised the prospect that Santos could look at some M&A activity to start shoring up its growth prospects.
One company that Santos is thought to be looking at is Comet Ridge and the prospect of making a deal has been heightened by its ongoing debt reduction program. Its target to reduce net debt to below $US2bn is now expected to be met in the current half. The debt levels stand at $US2.4bn, which was down $US100m.
Macquarie analysts say Santos has to tell its shareholders why Harbour’s $7 a share offer undervalued the company.
The bank said success in the Cooper Basin, higher drill counts and an offer of a farm in agreement at P’nyang, the PNG asset, helped in some way to back the board’s argument.
However, it said ongoing problems at Santos’s Fairview gasfield in the Bowen Basin showed it was not “all smooth going” for the company.
COI Price at posting:
37.5¢ Sentiment: Buy Disclosure: Held
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