Slip of the tongue, or your final word? Watchdog asks Santos to...

Slip of the tongue, or your final word? Watchdog asks Santos to explain
COMMENT
Matthew Stevens
November 10, 2006
HAS what looks like an unfortunate slip of the tongue derailed Santos's lurching $602 million approach to its coal seam gas target, Queensland Gas?
The Australian Securities and Investments Commission yesterday sent a "please explain" to South Australia's gas company after its spokesman was quoted on Reuters saying: "We are sticking to the offer of $1.26 per share, which we believe is a fair price to pay."

What ASIC is pondering is whether that comment, reported on Wednesday evening, may have indicated to the market that Santos had gone final on an offer which most of us reckon was merely indicative.

That, of course, would mean that, from the offer's close, Santos would not be able to return to the fray for another six months.

Which would, in turn, be seriously costly, given that QGC's defence is essentially based on delaying Santos's bid for as long as possible so that the coal seam gas producer can complete an accelerated drilling program aimed at formally bumping up its bankable gas reserves.

Santos has, in the most politic way possible, told ASIC that its concerns about the comments are absolutely unfounded. But the company also responded by dispatching to the ASX a notice, which was published at about 4.45 yesterday.

While ostensibly "dissing" the import of QGC's 64 per cent upgrade of its proved and probable (2P) reserves, Santos, in passing, noted that nothing had altered its "assessment that its offer of $1.26 a share is fair for QGC shareholders".

But that might not be enough.

ASIC is understood to remain concerned about the comment and the fact that the market traded for most of yesterday without a clarification from Santos.

ASIC is expected to request further information from Santos today about the mis-statement and I understand no decision has yet been made on whether or not Santos has technically, if accidentally, gone final.

Now this is all manna from takeover heaven for QGC boss Richard Cottee.

Need it be said that it was Cottee's defence team at JPMorgan who alerted ASIC to Santos's little problem.

That the Santos comment was made in response to to QGC's confirmation of a 64 per cent increase in its key proved and probable (2P) gas reserves only adds to the delicacy of the situation.

The really significant thing about the big increase in reserves, confirmed by an independent expert on Wednesday, is not so much the quantum but how little time it has taken to deliver the additional 2P.

QGC is but six weeks into a year-long drilling program which is aimed at pumping up its 2P reserves from 422 petajoules to Cottee's foreshadowed 1000pj.

Now that additional 273pj might well be just the low-lying fruit of QGC's drilling campaign and it might well be the product of drilling done, as Santos claims, ahead of Cottee's new effort.

But if that rate of addition is anywhere near consistent, then QGC is going to be looking at bankable reserves comfortably higher than his anticipated 1000PJ by the end of 2007.
Which is why Cottee is so seriously shopping for time. And why what could otherwise be a storm in a regulatory teacup might well be worth pumping up into a full-scale legal stoush about truth in takeovers.

Meanwhile, of course, the market says QGC is worth $1.42 a share. Which is why any suggestion that Santos has gone final is so damaging.

You get the feeling Santos knows full well that $1.26 is not enough. Rather, like private equity, it is allowing the QGC souffle to rise to an indicative level and pushing the QGC board to provide sustainable valuations in its target statement and details of why the Santos offer was so quickly rejected.

But that is just what QGC seems to be attempting to avoid. Which is why when the target statement goes out next week it will not be accompanied by an independent expert's report.

Santos, to its frustration, is understood to have held discussions with QGC about what it regards as a proper valuation, only to be told that it is too early in the company's maturation for any realistic assessment.