Quadrant Energy talk puts focus on Santos's ambitions
by Angela Macdonald-Smith
Suggestions that Santos has turned an acquisitive eye back to Western Australia's biggest gas producer Quadrant Energy have raised questions on what the oil and gas producer has in store to justify its comprehensive rejection of Harbour Energy's $14.4 billion takeover offer.
The speculation has not been confirmed by Santos, where chief executive Kevin Gallagher has instead pointed to an upside in gas production from the Cooper Basin and other internal growth options such as the Barossa gas project and opportunities being pursued in Papua New Guinea.
But Mr Gallagher has made no secret of his interest in building up Santos' Western Australian gas business, lending weight to talk that discussions with Quadrant may be back on, after being interrupted by the Harbour takeover proposal. Quadrant, the owner of the former Apache Australia interests, partners Santos in several WA operations including the Devil Creek gas processing plant near Karratha, the Varanus Island gas plant and the Reindeer and John Brookes offshore fields.
"The Western Australian domestic gas position is a prized cash cow in Santos' portfolio," said Saul Kavonic at consultancy Wood Mackenzie.
"Doubling down there via acquiring part of Quadrant can make sense for Santos as they can make a well-informed acquisition, and benefit from sitting on both sides of the joint venture fence."
Brookfield, advised by Citi and Goldman Sachs, is understood still to be looking to sell its 48 per cent stake, but the passive nature of the investment, with no operating control, is widely seen as a stumbling block, particularly for any oil and gas player.Quadrant's owners, Canadian investor Brookfield Asset Management and a group of Australian investors led by Macquarie Capital, pulled a potential circa $3 billion float of the business in February amid a disagreement between Brookfield and Macquarie on the exit strategy and timing.
In any case, with Quadrant "performing so well", Brookfield may also be happy to hold onto its stake for the time being, EnergyQuest suggested in a recent report. For Santos, meanwhile, funding for any bid stands as a major hurdle, although some bankers suggest that Mr Gallagher's work to put the balance sheet back on track means investors would back a rights issue for the "right" deal.
Quadrant, whose revenues are underpinned by fixed price contracts, is "throwing off a lot of cash flow" at current oil prices, one banker said.
Still, Mr Kavonic also suggested Santos could be just "a stalking horse" in the Quadrant play, enabling price discovery for the other Quadrant shareholders to take out Brookfield's stake.
He also couldn't rule out Australian Competition and Consumer Commission or WA government concerns if Santos were to buy all of Quadrant, noting it would "eliminate one of the more motivated domestic gas-focused players in the WA market".
Quadrant was the country's fourth-largest producer of conventional gas in the year to March 2018, producing almost a tenth of the total, just behind third-placed Santos, according to EnergyQuest. In WA, the companies are number one and three, respectively.
The speculation comes amid continuing debate in the market whether the Santos board was justified in spurning Harbour, with some investors regarding the offer price as full.
But FACTS Global Energy chairman Fereidun Fesharaki backed the Santos board and the "really strong" executive team. He suggested the ultimate value of Santos could be higher given the potential to boost output at the GLNG export plant in Gladstone, where capacity is lying almost half idle because of a lack of economic gas supply.
"If they can access some gas they can get huge upside [from GLNG]," Dr Fesharaki said. "They have a whole train they are not using. It's like these guys have an eight-cylinder engine but they are only running on four cylinders."
The talks about Quadrant, which is also the country's fourth-biggest oil producer, adds to the flurry of acquisition interest around Australian oil and gas this year, which has included AWE, Sino Gas & Energy and now APA Group as local targets, as well as Santos.
The strengthening oil price has improved investor sentiment across the sector, with Morgan Stanley last week upgrading its view for the Australian energy industry to "attractive".
Santos shares closed on Tuesday at $5.93, a relatively modest 7.9 per cent below the $6.44 high they reached before the Harbour rejection.
AFR
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