I thought it would be a worthwhile exercise to challenge some of my views and interpretations of the known facts. Because it is easy to find evidence for what we WANT to believe. So, can we find some evidence that rejects our theories?
So, here is a some contrary interpretations to the known facts:
- Hillgrove sold ESG because they had limited cash, and so was a 'forced' seller. Given the market at the time, $1.00 plus top-up was the best they could do. They viewed the CSG sector as approaching maturity, and saw some downside risk. The cash-in-hand, to forward Kanmantoo and their Indonesian exploration was too good to refuse when Santos approached them. They do not hold out much hope for the top-up - but if it happens, it will be a bonus.
- Hillgrove diluted down to just under 20% of ESG to make it easier to dispose of their ESG holding without requiring a purchaser to takeover ESG.
- Santos have "learned from the mistakes made at QGC" - rather than being outbid by those with deeper pockets, they are going to take a cooperative approach. Gain a key strategic holding, but work WITH their JV partner to add value to PEL 238, gain technical knowledge of the area, and help to commercialise the gas. So, no open auction, no being outbid. Work from within to achieve their goals.
- Perhaps the grab for land in the CSG sector is over. Post the GFC, most of the majors have the gas they require, and the sector has entered a period of consolidation of the existing projects, rather than acquiring new companies.
- Perhaps Santos does have enough capital requirements going forward (a 'full plate'), and so are not in the business of adding to their long-term gas reserves. Perhaps the market views Santos' growth prospects as medium term anyway, as evidenced by the negative response to the ESG purchase. So, it is now their plan to divest minority stakes in existing projects so as to have the means to commericalise what they have already got. They too may be in a period of consolidation rather than expansion.
- Perhaps in the absence of certainty after the failed Copenhagen talks, and the twice-rejected ETS, perhaps there is not a strong imperative to secure gas for gas-fired power generation. Perhaps there is still uncertainty regarding NSW electricity privatisation, and hence no great hurry for acquistions in that state.
- Perhaps the metrics paid in all the QLD acquisitions were a 'bubble', that even major energy companies got caught up in. Perhaps cooler heads, post-GFC, will not pay those sort of prices just to acquire gas companies.
- Chris Sadler: perhaps his joining the board is more to do with his skills and contacts in the investment banking community. Perhaps if ESG is planning to commercialise their own gas, they needed Chris' skills to assist in debt financing. Perhaps there are no plans for a multi-party auction, like happened at GCL or Mitre 10.
- Perhaps the accelerated pace of drilling and resource expansion, despite ESG being market constrained, is NOT evidence of near-term auction. Perhaps it is required to create investment certainty to go forward on the commercialisation path themselves. Perhaps the focus of ESG, going forward, will switch from CERTIFYING gas to DEVELOPING and SELLING their own gas.
- Perhaps there will continue to be a glut of LNG. With competition from the NWS, perhaps the profusion of projects out of Gladstone will well and truly meet the market demand, and then some. Perhaps ESG, beng in NSW, and being later in the cycle, have missed the boat.
Now, I have NOT changed my views on ESG - these ideas are not my views - just challenges to our thinking.
I still believe ESG is more likely than not to go up the food chain in the next 12 months, and probably aftet the imminent reserve/resource upgrade, and before the next one.
So, what do we think? Is ESG going to be a large independent gas producer, raising more capital/debt to commercialise their large resource. Or, are they going to go up the food chain?
Y (my sentiment remains, strongly, a buy).
ESG Price at posting:
89.0¢ Sentiment: Buy Disclosure: Held
