Eureka Report
Santos in a huddle
By Tom Elliott
July 12, 2010
PORTFOLIO POINT: It is in talks with several parties, and the Chinese could come in and push prices higher.
Santos (STO): Talk of consolidation in the gas sector appears to have been confirmed after it was revealed that Santos has entered into negotiations with several parties, one of which is widely tipped to be Royal Dutch Shell. Shell is competing with Korea Gas and Sinopec to buy a stake of between 9% and 20% in the Gladstone project, which is said to be worth about $1 billion.
The question is now whether or not Chinese companies will come in and push the price of these assets higher.
This does not mean that a full takeover of Santos is in the wings the deal will most likely be done at a project level, which is still good news for Santos and its shareholders. That was certainly reflected in the share price, which rallied almost 10% on Friday and another few notches today to $14.10.
There are currently four separate coal seam gas projects in Queensland; eventually I think there will be just two it makes more economic sense.
The other big companies in the coal seam gas sector are Origin, which has partnered with ConocoPhillips, and BG. Its quite possible that BG could partner with Origin and Santos could team up with Shell, paving the way to buy out the other smaller players. Its an inevitable conclusion as they all use the same process and the scale buys them bigger profits.
The problem was that it would have crippled Santos to develop this by itself; that is why it has to find partners. Obviously big petro-companies such as Shell are the obvious potential suitors in this game.
There are also rumours that Sinopec and PetroChina (PetroChina is the 50:50 partner in the Arrow takeover) might be interested as well as they are eventually going to be customers so it would make sense for them to secure an interest in production. This is definitely a situation to keep an eye on following on from the resolution of the resources profit tax.
Eureka ReportSantos in a huddleBy Tom ElliottJuly 12,...
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