all paths lead to confrontation with santos, page-11

If you don't mind King, let me challenge you about your perceptions of value and price. And, I will use Buddy as a case study in 'behavioural finance'. As a student, I'm sure you may be interested in how malleable our perceptions of price and value are.

In the case of a multi-party situation, the starting share price is going to be irrelevant. The price will be determined by how much the resource is worth to a large player, and how bullish the competition is for that resource.

One bidder = modest result.
Two (or more) bidders = large result.

Ignore the current share price. It is a misleading 'price anchor' on which to assess value. In past situations the starting point has been irrelevant, and it is irrelevant with ESG. Just like a starting point for a house auction is irrelevant. As long as the auction is contested, people will bid up to where they are prepared to bid to secure the property. And the seller will not sell below reserve price.

Let me give you an example. If ESG came out on Monday and said to the market, "we have turned down an offer from an unnamed party for $2.00 per share. We will continue to keep the market informed, as discussions take place with a number of parties."

What do you think the share price would do? Would your perceptions of value change, with this one sentence? Or, would you still be happy to take $1.50? And yet, what has changed in terms of the value of the gas? Nothing. The only thing that would change would be your perceptions of value. Based on what you now know someone else is prepared to pay. In an instant, your price anchor will have been reset to $2.00, and I bet you will now be eyeing off $2.50 or more.

All so arbitrary.

See how easy perceptions of value are malleable? In an instant they can change, based on knowledge of what someone else is prepared to pay. People who were thrilled to sell at $1.50 are buyers at $2.00. In an instant.

Ask ourselves, 'do I have a value in my mind for what ESG's resource is worth that is independent of share price', or do I base my judgement of value in relation to the current price? (which must be right, huh? The efficient market and all that...)

What if ESG came out and upgraded their 2P reserve to 3,000PJ of 2P, based on a deal to sell to the Japanese... would that alter your perception of value? Let's just say the Japanese are wanting to buy in at $2.00 per GJ of 2P. Would $1.50 still be a fair price? I doubt it.

ESG doesn't bother to try to get their share price up in the last 12 months. Why show the market all your value so that retail investors like Buddy are happy. Buddy isn't the market. The majors are the market. So the trick is to keep your options open, prove your reserves and economics and sell yourself to the majors. In a contested situation. It is waste of time trying to convince the Buddy's of this world.

(btw, see how Buddy is a rather good case study. In the excitement after Santos bought into ESG, Buddy get's all excited and talks about $3.50-$4.00 in a takeover. Then, his expectations are lowered by time and price, to be a seller at less than a dollar. ESG has more gas and more market certainty (and their suitors have more cash and more market certainty), but Buddy's price is now less than one quarter it's old target. And it is because he has no firm idea of value of the resource, just a moving set of expectations, which can be managed up and down.)

MALLEABLE.

This is why shorting works before a takeover bid. You hold down the price, lower people's 'price anchors' and expectations, and then offer them x% above the prevailing price.

This is why me pointing out past purchases of comparable resources and metrics meet with such hostility. Because they imply a much higher value. Certain parties do not want you using past metrics as a guide to ESG's value. They want you to use the current share price as a guide to value.

When I have spoken with DC-10, and asked him whether he thought the average past transaction metric was still applicable today, he has said yes. And his public statements on value back this up. So your Directors do not think the current share price has anything to do with the value of the resource. The value of the company has to do with the amount of gas, and the full-field economics of that gas to a major buyer. And certainly not the value of the share price to a retail investor.

ESG has at least two trains worth of contingent resource. That is, just contingent on securing a market. Santos has recently signed a $100 billion deal for 5mtpa - 1 and a half trains worth of gas. So why would anyone consider selling a resource who has 2 trains worth of GIP (gas in place) for only $1.5 billion? Why would you sell a resource of a similar size to QGC for one third the price?

Gas is a commodity. It doesn't come in fancy brands or better flavours. it is all the same stuff. So why would anyone agree to sell their gas for 1/3rd of the price that someone else sold their gas for? Just because their expectations have been lowered. That is the only reason.

The only thing that matters for a gas company is how much gas you have, do you have a market for it, and how cheaply can you get it out of the ground and then sell it for.

Just wait, and watch your perceptions of value change as events unfold. I bet many of you here will be buying at prices above what you now claim you would sell for.

Yaq