Rumours have been doing the rounds in Australia today that Santos, the gas and oil company based in Adelaide, is about to be bid for, possibly by BP, Shell or Eni. We don’t know how how reliable those reports are, but they are certainly plausible. Santos makes a tempting target.
The company has been developing its position in coal bed methane (or coal seam gas, as the Australians call it), which as its name suggests is gas produced from coal reserves. Over the past year there has been a rush of interest in developing the coal bed methane reserves of Queensland, in eastern Australia, to feed LNG plants that can serve lucrative Asian markets. Santos did a very richly-priced deal with Petronas of Malaysia in the region last year.
Many of the best Queensland coal bed methane properties have now been snapped up. BG Group of the UK announced today it has won Pure Energy, a small player in the region that brings some useful extra reserves, for A$995m, after winning control on Monday.
Any company wanting to get into the area would find Santos an interesting proposition. The Suncor Energy / Petro-Canada deal announced on Monday showed how developed countries’ “unconventional” resources such as coal bed methane and oil sands are a focus of interest for M&A. Shell, in particular, which has been dilatory in its investigations into the possibility of exporting LNG from Queensland, might want to make a move.
Santos is quite a complex company, with assets in as far-flung locations as Egypt and Kyrgyzstan, which will make a bidder’s life more complex, but the headache would probably be worth it.
The biggest obstacle is likely to be financing. Shell and BP and both AA credits, and able to tap the bond market pretty easily. BP is the UK’s biggest borrower in the bond market this year. But both Shell and BP will be piling up the debt this year simply to fund their capital spending programmes.A price tag of about $9bn (US) for Santos would probably not quite be prohibitive, but might be near the edge, and both companies would certainly rather use at least some shares.
The Chinese have the money, but no knowledge of LNG, and so would probably miss an important component of Santos’ value.
So who has huge LNG experience, $31bn cash on the balance sheet and lacks a strategic position is eastern Australia? Step forward Exxon?
