Knox looks to the future as Santos spouts confidence Matt Chambers From: The Australian September 11, 2010 12:00AM
SANTOS chief David Knox this week brought certainty and one of the world's biggest natural gas players to the Gladstone LNG project.
He also provided a potential avenue to market Cooper Basin shale gas, which is stranded at current prices.
The market reaction?
To wipe $1.3 billion from the company's value in the stock's two most frenzied trading days in more than a year.
A big reason for the drop was that the entrance of French major Total to the project came with the forfeiture of a $US500 million ($540m) payment due to Santos from GLNG joint venture partner Petronas. And this just before the company is expected to have to raise up to $2bn from the sharemarket to fund the project.
Knox does not appear overly concerned by the share slump and the short-term focus of a market he says is not seeing the big picture. "We've got to look beyond the short-term share price," Knox tells The Weekend Australian. "It's really important as a chief executive that you focus on creating long-term value and we know this does.
"This has economic value that swamps the $US500m that we have forgone for the second train -- absolutely swamps it."
While that might be the case, Thursday's announcement that Total had bought a 20 per cent stake in GLNG (15 per cent from Santos and 5 per cent from Petronas) let down a market that was expecting a similar deal with Korea Gas or Sinopec to be announced, free from any compromises.
As a result, Santos shares have slipped 11.3 per cent in the past two days, with each day producing the highest trading volumes since a May 2009 equity raising was announced.
"The market doesn't like surprises and the deal we'd done with Total was very confidential -- and it was kept that way," Knox says. "I believe when they (investors) reflect on it they will see this was an extremely strong deal."
Between now and the end of the year is crunch time for Knox.
That is the timetable he has set himself to get all government and board approvals to build a $10bn-plus LNG production train at Gladstone. To do so, he will need to arrange funding and fully commit gas for a second train -- investment approval for which is expected 12 months later.
Environmental approval is due by October 11, which is expected to clear the way for announcements of further equity and LNG sales agreements with Korea Gas and Sinopec.
To scrape together its share of the project costs for the first train -- which could be as much as $6bn, based on Santos's current 45 per cent interest -- Knox does not rule in, or out, cancelling dividend payments.
He says it will all be considered when funding is looked at in the light of the final equity stakes for the project, and when costs are nailed down.
Macquarie analyst Adrian Wood says Santos may be able to limit itself to a $1bn equity raising if it cancels dividend payment, sells another 5 per cent equity stake and issues hybrid securities. "It seems crazy to effectively raise money to pay a dividend," Wood says.
"Although we recognise that, given Santos's franking credits, this may not be well received, this is unquestionably in the best interests of the company, long term."
Despite labelling the deal as more negative than positive, Macquarie has boosted its net present value estimate of Santos by 3 per cent following the Total deal. Analysts tend to agree the negatives of the deal outweigh the positives.
But the view is that the sharemarket reaction was overdone and was the result of inflated expectations the company had done nothing to puncture.
Knox says talks with Total started at the beginning of last year, but the French company had only become one of the top contenders in the past three to four months.
This was about the time Asian buyers, which were expected to join the project, had eased off their interest because of uncertainty over Kevin Rudd's proposed mining tax.
Analyst remain sceptical the project has enough coal-seam gas to support two trains, which was highlighted by Santos securing the right to supply its other east coast and Cooper Basin gas into the project. Knox says this could be a way to unlock the shale gas potential of the Cooper Basin, which needs domestic gas prices of about $3 a gigajoule to double to be economic.
