Little more than two years since it was brought to its knees by the oil price collapse, Santos has emerged as an unlikely sought-after prize to form the basis for a new global LNG powerhouse.
Proof of the keenness of Harbour Energy to get its hands on the modest Adelaide-based oil and gas producer lies in the quick-fire succession of proposals the private US player made in the run-up to Easter.
By the time the latest $6.50 a share deal was put to chairman Keith Spence on Maundy Thursday, the $13.5 billion all-cash offer was a massive $4 billion richer than the original $4.55 a share proposal that was swiftly and scornfully dismissed by the board last August. It was also a 30 per cent premium to the trading price.
The leap is not all explicable by the 36 per cent jump in crude oil prices in the interim, nor by the significant improvements on costs and break-even levels made under chief executive Kevin Gallagher.
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For Harbour boss Linda Cook, a LNG veteran that built her formidable reputation over 29 years with global powerhouse Shell, Santos poses a singular opportunity.
"Linda's ambition is to have a global LNG platform – the next BG," says Saul Kavonic at international energy consultancy Wood Mackenzie, referring to the international LNG player BG Group that was swallowed up by Shell for $US53 billion in 2016.
"For a new player looking to establish itself in LNG, Santos is a uniquely attractive target given its portfolio of LNG assets, growth options, and bite-sized price tag," he says. Appealing assets
Those assets include stakes in Asia-Pacific's premier and readily expandable LNG project in Papua New Guinea, as well as in the ageing Darwin LNG project, which is poised for a life extension investment, and the troubled GLNG project in Queensland, which is running well below its rated capacity.
Its domestic gas assets include the long-standing Cooper Basin venture as well as gas plants in Western Australia. Latent capacity lies in Queensland coal seam gas acreage, the controversial Narrabri CSG project in NSW, Northern Territory shale exploration acreage and undeveloped resources in the Browse Basin and off the north coast, where work has been slow as debt-laden Santos put longer dated projects on the back-burner.
Put together with the North Sea assets acquired from Shell last year in a $US3 billion deal, Santos' portfolio would catapult Harbour – managed by private equity giant EIG Global Energy Partners – to a size roughly on a par with Woodside Petroleum or British-listed Dana Gas. Production would be about 290,000 barrels of oil and gas equivalent per day, with reserves sitting at 1.2 billion barrels of oil equivalent.
"We have had our eye on looking for the best opportunity for us to get into LNG and Asia-Pacific – I see those as pretty closely linked – and that's what led us to thinking about Santos," says US-born Cook, a one-time trainee on oil rigs in Michigan whose track record at Shell has earned her the moniker of the "first lady" of oil and gas.
Significant hurdles still stand in the way. Foreign Investment Review Board approval is widely seen as the biggest, particularly given the hot-button issue of the tight domestic gas market on the east coast. Harbour's obvious LNG focus compounds worries domestic gas will not be a focus.
Then there are Santos' Chinese shareholders Hony Capital and ENN Holdings, and their appetite to take up Harbour's offer to roll their combined 15 per cent stake in Santos into an unlisted entity where they would likely have less influence.
Harbour's funding – including $US7.5 billion in debt and equity investment from trader Mercuria Energy Group and others – has yet to be locked in, while the due diligence process now embarked on by Harbour may yet reveal unsavoury findings, with the short-of-reserves GLNG venture seen as the most likely suspect.
When it comes to FIRB approvals, Cook is well aware that Harbour's intentions for the future Santos will carry considerable weight and is going on the front foot to press home the advantages that a deep-pocketed new owner will bring. 'Vibrant' goal
Harbour's strategy for the new Santos involves leveraging the existing assets and capabilities "to create a vibrant, growth-oriented global company" focused on gas supply both for Australia and the expanding international LNG market.
While some observers are casting doubt on Harbour's commitment to the domestic gas market, Cook's message is somewhat different, emphasising the benefits also to local gas users of increased investment in drilling across the Cooper Basin and eastern Australia.
It is an argument that is finding some traction amid some energy users, despite Harbour's foreign ownership.
"I am more positive than negative [about a potential takeover of Santos] because anything has got to be an improvement," says Garbis Simonian, head of small NSW industrial gas retailer Weston Energy. "There is going to be a lot more capital available and the gas industry needs capital to develop."
Harbour can point to its North Sea acquisition, carried out through British-based entity Chrysaor, as an example of its willingness to invest. At the Armada field, which Shell had deemed non-strategic and had slated for decommissioning, Chrysaor scrapped the abandonment plan and is finalising a $US100 million investment in drilling plus additional wells in 2019 to prolong Armada's life for at least 10 years.
On Santos' home turf in South Australia, meanwhile, a commitment to retain Santos' Adelaide HQ as well as its name looks set to mollify the concerns of new Premier Steven Marshall, although Harbour's intentions on jobs remain vague.
The market is still betting approvals won't be forthcoming, with Santos shares closing at $5.88 on Friday, up 3¢ but still 9.5 per cent off the proposed offer price.
In any case, says Citigroup analyst Dale Koenders, whether that price looks good for investors depends on their horizon. He estimates Santos' management could unlock more than $2 a share in additional value over the next two years as Gallagher and his management team work up growth opportunities within the business.
What would be the biggest M&A deal in Australian oil and gas and the largest private equity deal in the sector, still has some way to play out.
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