hgo expiry timing, page-13

WARNING: LONG POST.

Torente,

Yes, excellent post, and I totally agree.

Whatever people's view of HGO's likelihood of receiving the top-up now (very slim, IMO - on that I agree with Holy... although why he has to keep stating the obvious is beyond me), it has to be recognised that HGO and ESG between them avoided a full auction of ESG back in early 2009.

To review - The forced sale of Gastar's 35% stake of PEL 238 threatened to kick off a move on the whole of PEL 238 (that is, including ESG). Meanwhile HGO had around 23% of ESG (fully diluted), was lowish on cash and was being looked at due to their low shares price, and not-tightly held register. At ESG's capital raising in H1 2009, HGO decided to forgo their 'blocking stake' of over 20%, and diluted down to exactly 19.99%. Exactly. They did participate. But only to the extent of going just under the 20% takeover threshold. This achieved a number of things:

(1) It enabled HGO to privately tender it's ESG stake, without it kicking off an auction for the whole of ESG. HGO could avoid further share dilution at low prices, pay off their own convertible note debt, avoid the possibility of them being taken out by another predator, and allowed them to forward Kanmantoo and explore for Indonesian copper and gold.

(2) It enabled HGO to monetise its ESG stake, whilst retaining upside to a takeover of ESG within 18 months.

(3) It enabled ESG to defer an auction. It bought ESG extra TIME.

(4) And it enabled Santos to get a strategic stake in a world class resource, after the failed bid for QGC. Back then, Santos knew it needed extra gas. And PEL 238 and ESG could provide it. ESG and PEL 238 was also a great strategic fit for Santos, given their other (immature) Gunnnedah basin holdings.

(5) And it bought Santos time also. Time to raise more cash, divest non-core assets, secure offtakes, secure extra debt funding and get the final tick - the federal environmental approvals. Santos were not ready for an auction back in early 2009 either. Now, they are.

So WIN-WIN-WIN.

This is an absolutely crucial point if we wish to understand what ESG's strategy was, and is.

Consider what would have happened if HGO had not diluted down to 19.99%. What if HGO had decided that they were going to auction their 23% fully diluted stake in early 2009? Think about it. It would have kicked off a full auction for ESG.

Instead, ESG deferred a full auction until they greatly improved their 2P reserves, advanced their commercial 'optionality' and proved their production pilot data. (Needless to say, you get a hell of a lot more money for well over 988 PJ of 2P than 336PJ of 2P. And, you get a hell of a lot more if you have two people who want you, rather than one.).

So for HGO to do what it did - to dilute down to 19.99%, SAVED ESG'S BACON. And it is reasonable to assume that there was some sort of understanding ... a general indication of what ESG's board planned to do and when. And David Archer, as a board member of ESG, knew ESG's strategy as well as anyone.

Shareholders in ESG should also understand the relevance of the HGO dilution and sell-down in terms of ESG's strategy now. Why would David Archer, in full knowledge of ESG's strategy, think that HGO would come into extra money? If ESG's plan was to become a large independent producer, why would David Archer think a takeover was likely? He wouldn't, because clearly, that was not and is not ESG first option.

ESG are clearly orchestrating a multi-party auction. They have got alternative parties to Santos, namely the Japanese, and can extract the maximum dollar accordingly. If they only had one interested party, Santos, they would not get a reasonable price.

One party = A modest result;

Two parties = AUCTION = BIG result.

ESG are now demonstrating to the market that with wealthy Japanese backers, with access to customers, technical expertise and finance, ESG could go it alone (with Japanese equity partners). But, I don't think that is ESG's first preference.

SO, with the green light given to the sector; with Santos about to announce their offtake and equity selldown to Kogas; and with all (conditional) approvals for Santos and BG now in and those conditions being acceptable to Santos; with Santos having raised cash; Santos having divested other assets; Santos having two trains of gas offtakes secured; Santos still needing extra reserves for their second train; and with ESG now having the second interested party in place (Marubeni)...

It is full steam ahead for that auction/tender process.

Yaq

Apologies for this post. Wine and fatigue may cause some slurring of ideas and grammer :D