the biggest problem with the ier

As I see it, the biggest problem with the SoA and the IER is the reliance placed on the current reserves.

380 pages. There is a lot of discussion about technical and market risks, about recent transaction metrics etc...etc.

But the bottom line is, ESG is being sold on the basis of their current 3P reserves. There is no recognition of:

- the (near) future reserves contribution of Tinsfield and the Hoskissons seam.

- the fact that there is a Carbon Tax currently before the Federal Parliament that will fundamentally alter the demand for gas in NSW and Australia. In fact, Santos has publicly stated that domestic demand will triple between now and 2015.

- What Santos will do with the gas. There is currently no recognition in the reserves statement for an LNG market for ESG's gas. And yet Santos as the 'purchaser' of ESG shares has publicly stated that they intend to use Gunendah gas in their GLNG project. Currently, the GLNG project does not have the requsuite 2P reserves to service GLNG's commitments).

- The 'timestamp' of the reserves and hence the appropriate metric(as David Knox calls it). That is, if you measure a companies value solely on the basis of a current 'metric', and price per GJ multiplied by the current reserves, it ignores the timestamp (that is, how much upside their is in reserves). So a field that is 20 years old will have far less upside in their reserves than a resource that has just begun to prove up reserves. So the application of a 'metric' which compared recent transactions, such as the Arrow transaction, needs to take this into account. There is more reserves upside to an immature resource than for one that has been more fully explored. More risk, yes, but more upside too. That needs to be reflected in the purchase price.

- How the LNG market has fundamentally changed, and LNG prices have risen rapidly in the last few years, because of the Great Japanese Earthquake and Tsunami.

- A reference to the Supply Shortfall of the LNG Projects in Queensland, and how there are 4 projects, 2 of which are already committed to their FIDs, which have less gas than they require. (reference the statements from all these majors about their LNG goals).

- A reference to the lack of independent gas companies on the East Coast with unallocated reserves.

- A reference to the metric paid by Santos for shares in ESG in 2009. Has the demand for LNG changed since then? Has the commercial and techincal certainty improved since then? Has the necessity for Majors to control gas reserves at source changed since then due to various legislative changes? Is the share market now less certain that in the early months of 2009 after the GFC?

- A reference to how ESG has got a land access deal with the NSW State Government, giving it unique advantages in terms of lowering the risks of competing land use. In short, no competion with agriculture.

- A consideration for the strategic value of ESG - How will Santos improve the economics of their existing project without acquiring ESG. The sorts of issues are absolutely essential in negotiations. HOW desperate is the buyer? ("a resource ... die fighting for..."- David Knox).


Valuing companies is never just about the reserves, here and now. It is about a reasonable assessment of future values, based on current information. So to value ESG on a current 2P or 3P basis alone, when that 2P and 3P is likely to change in a short time frame is obviously inadequate. There has to be some consideration of the contingent resource and the reserves upside that exists in that CR.

Or, to put it another way, would Santos be buying ESG if they thought that the current 2P and 3P reserves were finite, and that would be the extent of the gas they would extract from PEL 238? Of course not. What the CSG experience in Queensland has shown is that there is usually a higher percentage of ultimate recoverable gas in a contingent resource. Around 75% of the contingent is likely at the maturation of the field. That is in part why Santos, in selling equity in GLNG, got a higher metric for the Petronas transaction than for the Total transaction - because the 'timestamp' meant that there was more percentage upside earlier on, and less later on. So comparing the ESG metric, with Arrow, is flawed, without consideration of the timestamp.


Don't be intimidated by the 380 page document, and feel like a document written by an independent EXPERT somehow carries a truth or authority that you as a shareholder do not have. In the end, an Independent expert, employed by the company, is not independent, will come up with whatever conclusion is required. Just like an institution comes up with a value that is essentially arbirtary but sounds like it is grounded in some scientific basis. IT ISN'T. These numbers do not carry any great authority. You do not have to agree with it, and contained within in are lots of assumptions (and omissions), which a reasonable person knows are important. Some of these are mentioned above.


Think about it. It is up to YOU. I haven't decided what I will do. On one hand, there is value in ESG's gas with Santos, and in the absence of another bidder ESG prpbably should go up the foodchain. On the other, the price is clearly inadequate and does not reflect ESG's gas and its future value. And the communication of ESG, which has been misleading and inadequate, makes that decision all the harder.

The jury is out. Much will depend on what ESG (and Santos) do and say from here on in.

Yaq