Santos needs additional gas ripe for development – that’s a...

Santos needs additional gas ripe for development – that’s a given.

There are two ways at looking at Santos’s position regarding Mahalo and Mahalo North moving forward:

Firstly – Santos will exercise their option to increase their percentage in the main Mahalo Block from 30% to 50% plusacquire 50% interests in Mahalo North (ATP 2048) and Mahalo East (ATP 2061)because this will guarantee their 50% position in these blocks.

Should this option be exercised – this shouldprovide COI with the cash-flow required to proceed towards production meeting theirshare of costs.

Secondly – Santos will notexercise the above option/s because they believe that COI will run out offunding meaning that Santos is well placed to pick up all of COI’s Mahalo interests for a song under a forced sale basis – knowing that COI owes Santos $13.15million.

Should this option not be exercised – this leaves COI in a position whereby funding availability will need to be sourced from elsewhere to enable the company to meet future costs.

I’m sure our management will be fully aware of the above – so logic dictates that they are busily exploring alternative avenues for farm in partners and/or funding should Santos decide to ‘roll the dice’ and go for the second option.

Santos has cleverly positioned itself as the minority partner in the main Mahalo Block – with the majority partner (COI) in debt to them.

Should COI sell out to Santos in entirety which I believe is the most likely outcome – our management will have to tread carefully with negotiations because unless there are alternative farm-in partners wanting to snaffle a percentage of the Mahalo Blocks thus injecting funds into COI – it will be difficult to negotiate a price which the shareholding majority will see as being acceptable.

These are the two possibilities as I read thing.

I think the risk to Santos of potentially losing out to a competitor who could buy into the Mahalo Blocks is a risk too far for them – plus they know our management having worked alongside them for years. However – I also believe that they will see themselves as being in a strong negotiating position – thus the offer they will make to buy us out will be way below what many expect.

Just looking at this laterally – but let’s not rule out our management team working hard lining up alternative farm-in partners as a back-stop position to give Santos a 'run for their money'.

The ball is in Santos’s court – so we wait to see what unfolds.

Good luck All…