STO to CTP – “Guess Who is Your New Partner?”

Hi Posters

I am going to ventilate a few thoughts regarding the Macquarie Bank (MQL) purchase of the other 50% of Mereenie. I will do so in the hope that responses from other posters may help me “fill in the blanks”.

My issue is that the public announcements that are available just do not add up. It is apparent that CTP shareholders are short of a very significant amount of relevant information.

Very probably there are sensible reasons why the information is not available but, speaking as an old retired lawyer, I am uncomfortable and would like more information. By this time, one month after our company’s initial announcement, I had expected more clarity.

As that has not occurred, it may possibly be useful to get posters talking about the subject.

My discomfort is caused by the notion (implied by the announcements so far) that a new partner, in substitution for STO, has been forced on our company by the simple process of STO selling out. CTP’s announcement of 20 December 2016 to the effect that MQL is an “incoming” member of the Mereenie Joint Venture is just not credible.

There must be more to things than that simple transactional basis for the acquisition of a new partner.

A joint venture agreement is a form of partnership. The only reason it is not called a partnership agreement is that it relates to a single activity – a single venture – and is not a general commitment to act together in respect of all matters of business.

After taking into account that limitation, a joint venture remains subject to the normal principles of partnership.

If one acknowledges that the JV relationship between CTP and STO was effectively a partnership, then it is extraordinary to suggest that CTP had no say in the relationship coming to an end and a new party (MQL) being injected into it!!!

Yet that is the suggestion to be drawn from our management’s audible silence on all matters concerning the transaction.

Reading the announcement of 20 December the implication is that our management was taken by surprise and was unaware of the sale details such as price and settlement terms!!!

That just cannot possibly be correct.

The principal essence of a joint venture relationship is that (as a partnership) it is personal. If one of the members of a joint venture wishes to withdraw and sell its share, it must have the agreement and cooperation of the other party to the joint venture.

It is not just a matter of courtesy if a party wishes to break a partnership agreement. STO would have no right to say to CTP:

“This company does not wish to be part of the joint venture anymore so guess what – you’ve got a new partner! We have sold out to MQL. You two have to work it out now.”

In normal circumstances, where there is a properly crafted joint venture agreement, a partner who wishes to “opt out” by sale of its share does not have the privilege, of saying to the other member of the joint venture:

“That’s it I’m out. I have found somebody to buy my share and you are stuck with them!”

If it was possible for STO to do that, under some kind of authorisation contained in our June 2015 documentation, then who ever drew that joint venture agreement really got the better of our company. Either CTP’s lawyers were very bad, STO’s lawyers were very good or – I cannot think of any other alternatives.

Does anyone in the posting community have any previous experience with partnership in business? If so, wouldn’t you agree that my reservations are justified?

I suggest that the events which led to the blunt announcement of 20 December 2016, from our management, to the effect that we had missed out on the other half of Mereenie were far more complicated than CTP simply having been told of the transaction.

In my judgement, a far more likely scenario would be something along these lines:
​

1. 1. CTP, as STO’s partner, learns of STO’s desire to sell its half of Mereenie;​

​

1. 2. CTP insists on the first option to purchase the STO’s interest;​

​

1. 3. CTP’s claim of first option is justified by a provision in the joint venture agreement (and if none, by the general principles of partnership);​

​

1. 4. STO nominates a price for sale of the interest to CTP;​

​

1. 5. CTP notifies unwillingness or inability to pay that price;​

​

1. 6. STO introduces a purchaser willing to pay that price (MQL);​

​

1. 7. MQL and CTP must then negotiate on the question of whether they are willing to enter into a joint venture agreement (to establish a partnership between themselves) in substitution for the partnership between CTP and STO);​

​

1. 8. MQL and CTP come to an agreement on the basis of which they are willing to work together;​

​

1. 9. CTP gives STO its consent to sell the interest to MQL on the terms of the agreement between MQL and CTP;​

​

1. 10. The three parties, CTP, STO and MQL enter into a tripartite agreement (or separate but interdependent agreements) to regulate the sale and transition of the relationships between the parties (i.e. STO out, MQL in and CTP remaining as operator).​

Why does any of this matter?

Because, in normal circumstances, point 10 would be the time at which as remaining partner, CTP would have been in a position to negotiate and indeed insist upon very beneficial terms on which to give its blessing to MQL entering the joint venture (or, more accurately, the cancellation of the CTP:STO joint venture and the entry of CTP and MQL into a new joint venture).

The mind boggles when one reflects on the possibilities.

To begin with, we see that STO’s sale price to MQL is a mere $52 million. The price payable by CTP, for its half share, was more like $90 million (when we take into account the m$45 base, the m$15 NEGI bonus payable to STO, and the “free carry” of STO in the m$55 – m$75 NEGI Work Program which CTP was liable for).

Surely, in the entrance negotiations CTP would be in a position to insist that the “free carry” liability was cancelled. I speculate that our management would have been sufficiently skilled, and equipped with enough leverage, to succeed on this point.

Another possible point on which we might speculate is the future of MQL’s takeover intentions. The entrance negotiations would be an ideal time for CTP and MQL to arrive at a settled agreed future overall relationship. Would our management have been able to pin MQL down to a commitment to pursue only a moderately significant position as, for example, a cornerstone shareholder and agree to refrain from further incursions?

Another, even more optimistic, speculation that I place on the table for discussion is the possibility of the two companies, CTP and MQL, hammering out, and agreeing to, a future business plan aimed at rationalising their future relationship for mutual profit. It is only logical that both parties would want to know (and be assured of) the future business strategy covering such matters as:
​

• Customer prices and terms for future GSAs;​

​

• Circumstances that would trigger commitment to GSAs;​

​

• Funding of the m$55 – m$75 NEGI Work Program needed to develop Mereenie for production into the NEGI (see CTP announcement of 4 June 2015);​

A wildly optimistic speculation that may even be an outside possibility is that perhaps CTP and MQL may have looked ahead (or may be looking ahead at present) in respect of the whole CTP package. That is, for MQL to buy a 50% interest in a brownfield would hardly be the limit of its ambition.

MQL would surely have its eye on CTP’s potential bonanza in the southern Amadeus. It would know that our company needs to pony up 30% of the development costs of the future work commitments to be undertaken by STO in the southern Amadeus. Wouldn’t it make sense for the 2 companies to talk that future blue sky through and perhaps come to an arrangement about it?

My ideal outcome would be a commitment from MQL to put in the 30% in exchange for a half interest in CTP’s share of the tenements which STO develops. Bearing in mind that those tenements are being spoken of by STO in multi trillion cubic feet capacity, and bearing in mind the prospect of a world-class helium province, it would be reasonably painless for CTP to drop back to 15% in consideration of its new best friend MQL putting in 30% of the development cash.

Who knows?

But I do know this. We have not been told the whole story. Why do I say that?

The starting point is our company’s announcement of 20 December 2016. There the shareholders are told that McQuarrie bank has purchased the other 50% of Mereenie. No price is mentioned. No takeover date is disclosed in those terms except for the phrase “with effect from 1 January 2017” which appears without elaboration.

That announcement has got all the hallmarks of:

“We don’t want to tell you anything because at the moment there is nothing to tell you; everyone is still working on it.”

Then, on 20 January 2017, we see in Santos’ QAR (on page 2) this entry:

“In December 2016, Santos entered an agreement to sell its remaining 50% interest in the Mereenie oil and gas assets in the Northern Territory to a subsidiary of Macquarie Group Limited for A$52 million. Completion is expected in the first quarter of 2017.”

What that tells me, is that vendor and purchaser are still working on the transition and one of the reasons why it is not yet resolved is that our company, CTP, has an essential role in the transition which is still being discussed.

Obviously it will be quite a while before we really know the implications of the sale. Until we do, I think that it would be useful for shareholders to swap thoughts on whether the foregoing speculations are justified.
​

I do hope that these observations will attract informative comment.