Block the Santos takeover

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Via the AFR:

Big American oil is preparing to make a $11 billion all-cash takeover offer for Santos as the next step in play for regional and global relevance in rapidly reforming liquid natural gas markets.

A consortium of powerful global energy investors, led by a former executive director of Royal Dutch Shell, Linda Cook, is said to have recently approached the Santos board with an invitation to support a scheme takeover of the battle-scarred pioneer of Australian domestic and export gas sector.

The indicative pricing of a pitch that is expected to be ready to re-present to Santos within weeks is circa $5.30 a share, which would represent a 21 per cent premium to Wednesday’s closing price of $4.38, but a more modest 11 per cent over the recently achieved year high of $4.78.

That said, given the offer arrives with acceptable certainty and some potential for further discussion over a more appropriate control premium, there remains much to discuss, given that the indicative pricing would represent an 85 per cent hike on the year low of $2.87.

Absolutely no way should this transaction be allowed to go ahead. STO is the key player in the Curtis Island gas cartel. Handing to it another blood-sucking international oil giant to gouge the economy further would be completely bonkers. STO is yet to be brought to heal even as stands. Matt Canavan is full of it:

Federal Resources Minister Matthew Canavan has insisted that last month’s deal with east coast gas producers is doing its job in making more gas available and bringing down prices despite warnings from Incitec Pivot that a lack of affordable gas may force the closure of its Queensland fertiliser plant next year.

Mr Canavan pointed to the recent agreement by the Australia Pacific LNG project to supply Origin Energy with 41 petajoules of gas for the east coast market and noted that will cover about two-thirds of the projected shortfall in domestic supply for 2018.

He also noted spot prices for gas on the east coast had fallen to $6-$7 a gigajoule, down from $10-$12/GJ earlier this year.

But industrial buyers are still saying they are finding difficulty accessing more gas, with some complaining that higher-priced markets such as power generation were snapping up the increased supplies, leaving them short. Some say the government should have kept the option of triggering export controls on Queensland LNG for 2018, a threat it put on hold as a result of the deal with east coast producers.

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Those are spot prices not contracts. This is not about supply of gas, it’s about the price of the supply of gas and there is no evidence yet that contract prices – which comprise 95% of volumes – have fallen to export net back, let alone to where they should be. As Labor comes into power, it must strengthen domestic reservation materially. Having an ever more complicated set of international owners will not aid such an endeavour.

That said, the STO takeover could be an opportunity to force change on the sector. The ACCC could insist that the new owners divest assets as a condition of purchase. The government could acquire Cooper Basin assets and form a national oil company to supply local markets, as well as Narrabri. That would benchmark prices for the entire cartel.

But, given, that’s got about much chance of happening as I have of being invited to the STO AGM, we’ll have to stick with blocking the deal.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.