all paths lead to confrontation with santos, page-8

King,

WARNING: LONG POST. BUT, IT IS A LONG HISTORY.

The answer lies in two parts. One is what happened with QGC; the other, that ESG has had multi-party interest going back 18 months. And Santos knows it.

Back when Santos tried to acquire QGC, it was an enormous stuff-up. They must have been blindsided by BG, because they entered into a bidding contest they were not equipped to win. Yes, they may have stolen QGC if they were the only bidder. But, they weren't. And in an open battle with a larger and determined adversary, the smaller guy is always going to lose. And, of course, Santos did.

So, what happened this time? Well, Gastar was in financial trouble and so their share of PEL 238 was coming onto the market. Being a minority share it wasn't worth nearly as much per PJ as the majority holding and operatorship position. But even so, it threatened to kick off an auction for the whole of PEL 238 and ESG.

At the same time, HGO had a 23% holding in ESG. HGO were low on cash, and whilst they were not a forced seller (in fact, Santos approached them, not the other way around), they did want to progress Kanmantoo, explore Indonesia and pay off their convertible note debt. And, HGO themselves were being looked at...

So, why didn't Santos go for full acquisition of ESG at the time of their Gastar and HGO purchases?

(1) Because Santos had learned from last time. Do not go into a battle if you do not have the ammo to finish the job. If you are capital constrained, do not have the commercial certainty of offtake agreements for 2 trains, do not have the government approvals, and have lots of non-core assets you still need to dispose of, you are simply not ready to bid against the big boys. Kicking of an auction would have been history repeating itself.

(2) And because Santos knew then, as now, that there is multi-party interest in ESG. HGO themselves had multiple approaches (although they did not disclose to me who these parties were). DC-10 himself has said on numerous occasions that there is multi-party interest. So Santos were not going to start a fight they couldn't finish.

So, what happened next?

Well, have a look to start with at what HGO, in consultation with ESG and Santos did. HGO at the ESG capital raising in early 2009 diluted from a 'blocking stake' of 23% to exactly 19.99%. Yep, they threw away a blocking stake to one that could be sold, and yet not kick off a takeover bid. This point is crucially important if you wish to understand the whole game. Rather than HGO trying to auction their stake to the highest bidder - and neither ESG nor Santos were ready for an auction at that time - ESG and HGO organised it so that Santos could buy in without kicking off an auction.

(Also note how HGO continues to delay financing a start to Kanmantoo, despite having lots of cash and plenty of financing options. What do you think they are waiting for?) :)

ESG buys itself time to prove their full-field economics via the production pilots, get their reserves up and speak to numerous commercial and corporate partners. Having an auction when you have 300-odd PJ of 2P gets a modest result; having an auction when you have 2,000, 3,000 or 4,000PJ is quite another...

Santos gets the time they need to raise more cash, divest non-core assets, sell down equity shares in GLNG, and sign offtakes for 2 trains worth of gas. Also time for all approvals to be signed. And Santos get a foot in the door.

And HGO gets to monetize their ESG stake whilst maintaining exposure to an ESG takeover. They get to pay off their diluting CN debt, buy a mill for Kanmantoo, drill Indonesia etc.

Everyone is happy.


The thing is, Santos didn't miss out on QGC because they thought the price was too high. They missed out because they didn't have the money or the deals lined up. BG thinks they got a bargain, and boast about it. Where else in the world can you secure gas resources of this size, in open and secure sovereign risk countries? You can't. Which is why the likes of BG, Shell and Conoco are so keen on giant Australia CSG resources.

Anyway, this time, Santos has not rushed into battle without preparation. And, nor has ESG. The battle is not between ESG and Santos, it will be between Santos and other rivals. And this is why Santos couldn't pick ESG up cheaply early. Because there is, and always has been, multi-party interest in ESG.

Yaq