Harbour bid may be up to $1b short for Santos, analysts say By...

Harbour bid may be up to $1b short for Santos, analysts say
By Cole Latimer
18 May 2018 — 2:05pm
Harbour Energy's $13.7 billion bid for Santos may still be around $500 million to $1 billion below the price the Australian oil and gas producer would be willing to accept, analysts say.
On Thursday, the US private equity firm made its $US4.98 ($6.63)-a-share bid for Santos official but failed to sweeten the offer to take account of the rising oil price.
Harbour's offer will be the largest takeover of an Australian oil and gas company if it succeeds, however, Santos believes the bid undervalues the company. Chairman Keith Spence told the company's AGM earlier this month that the $US4.98 figure got Harbour in the door but wouldn't buy the farm.
This disparity in perceived value is driven by Santos’s tight management of its debt levels, the recent divestment of non-core Asian assets, Santos's likely issuing of a dividend in 2019 after years without a payout to shareholders, and a strong rise in the oil price after the US announced oil sanctions on Iran.
A source familiar with Harbour told Fairfax Media the unchanged offer took into account Santos's transformation path and long-term future oil prices. They said oil was in a state of backwardation, where current prices are higher than future prices, distorting the long-term value of companies in the sector.
Macquarie Wealth Management analysts suggested the unchanged bid was about resetting any runaway expectations built on the higher oil price. But they believe a new bid will still come because at the current price “it is essentially certain” Santos will reject the offer.Add to shortlist
Macquarie believes there is a wider bid range ahead of between $6.80 and $7.20 a share, slightly above Citi analyst James Byrne’s forecast of $7. This would lift the bid value to between $14.1 billion and $14.98 billion.
Macquarie analysts believe Harbour will continue its chase of Santos regardless of a rejection, progressing its Foreign Investment Review Board application and working with Santos’s board to craft a new offer and a formal upgrade.
"Harbour are playing a longer game," Macquarie's client note said. "There is no upside for Harbour to declare their hand, particularly as much could happen in oil markets before then.
"This would imply the offer represents a start to any negotiation with the board before agreeing to a scheme implementation agreement."
Fat Prophets analyst David Lennox agreed, saying Harbour’s tie-up with Santos's Chinese shareholders ENN and Hony showed the company was dogged in its pursuit of Santos. UBS analysts said they now believed “an offer capable to be considered by shareholders will emerge”.