This is Mr Lincoln Augustus, first second cousin of...

This is Mr Lincoln Augustus, first second cousin of Holymagiman

It is nearing 12 noon on another brilliant Saturday, and we are off for lunch, so I cannot tarry too long.

I did have time this morning to go over the details in the Santos Investor Conference Call that was done on 2 July 2009, and post them here, together with the thoughts of the family.

From the Santos Investor Conference Call dated 2 July 2009

These are the key facts that I can glean from the Telephone link-up of Mr David Knox, CEO of Santos, and various analysts.

PREAMBLE:

Mr Knox stated the following facts:-

1. quality of gas resources – a very high quality gas resource

2. $176m for 19.99% of Eastern Star

3. the acquisition by Santos of Gastar Exploration Limited’s 35% interest in various Gunnedah Basin exploration permits and production areas operated by ESG for $300 million;

THE FAMILY’S THOUGHTS ON THIS GASTAR SALE:

** Now, the question that has to be asked is this:- DID GASTAR EXPLORATION SELL TOO CHEAPLY???

The answer lies in the 2 July 2009 announcement from Gastar, the relevant portion of which is:-

J. Russell Porter, Gastar's President and Chief Executive Officer, commenting on the transaction and related actions said, "This is clearly a transformative transaction for Gastar. We pursued multiple avenues in order to address upcoming debt maturities and to fund the future capital expenditures necessary to continue the development of our Australian assets and our North American assets. After examining all alternatives available, we determined that the sale of the Australian assets was the most prudent course and provided the most attractive near term and future benefit to our shareholders.


In other words, Gastar was in a bit of a financial bother, and Santos made them the best offer at their most vulnerable moment. I would believe that there is much breast beating and teeth gnashing in the boardrooms of BG, Shell and the others. I have seen this happen before, where great advantage is taken to screw a party that is down and out, and one gets too carried away with the negotiations to realize that one is suddenly going to be gazumped . That, in my mind, is what happened with regards to the other gas majors such as AGL and Shell in their approach to Gastar’s 35%. **



4.Full support of the Eastern Star CEO and chairman – a collaborative deal.

THE FAMILY’S THOUGHTS ON THIS:

** This means that ESG knew that Santos was buying the HGO stake and Gastar’s stake. Could there have been any reason to collaboratively hold down the share price while the deal went through?? I would presume that the share price hit the brick wall while negotiations were in progress. Could this mean that the ESG Board expect a full takeover by Santos, by and by?: **


5. Gunnadah Basin has a fabulous resource potential – extremely substantiative, currently 52 tcf resources

6. Accelerates Australia’s next coal seam province

7. Significantly enhances a future LNG development in NSW - that is obvious to everybody


THE FAMILY’S THOUGHTS ON THIS:

** Including, of course, British Gas, Shell and AGL. More gnashing of teeth. **


8.Stand alone LNG operations will only be considered post Gladstone LNG. We cannot run the two things in parallel as we do not have the bandwidth to do that

9.At the time of equity raising, we said that we are monetising some of our non core assets, and at the time of the equity raising, we talked about our Timor Sea gas assets


** THE FAMILY’S THOUGHTS ON THIS :

Santos is selling its Timor Sea assets because it feels that those assets are nothing compared to the Eastern Star assets that they have bought **


Question time
QUESTIONS FROM ADRIAN WOOD, MACQUARIE:


a.You have a huge capital burden coming up in the next 5 years, perhaps more than the $11.5 or $12 billion dollars. Just from a strategic prospecti9ve, can you talk through exactly why you feel that the best use of the money now is taking another growth option rather than focussing your mind on delivery of the two key projects that you got going

b.And the second question is : just as the funding position tightens, AND I APPRECIATE THAT YOU MAY BE CLOSE TO A SALE OF THE TIMOR SEA ASSETS, but would you consider selling more than 9% of Gladstone LNG, or would you even consider selling a percent or two in the PNG LNG project, just to improve the finances.


10.The key thing that we are making sure is that we deliver GLNG – that is absolutely core.to our strategy and that is what the whole team in Queensland is set up to do.

11. We have signed 2+1 contracts with Petronas at very strong market prices

12.We are not losing our focus on GLNG

13.We have taken the opportunity that has arisen over the past week or a bit longer to get involved in a really high quality resource


** THE FAMILY’S THOUGHTS ON THIS :

Gee,someone did a fine job keeping the ESG price down in the last few weeks **




14.Have drilled 10 wells, have another 15 to go

15.We recognise that this is a really good resource. The coal is different from Queensland, they are much thicker in Gunnedah Basin but there is less cleating or fractures in them, but the coal is much much thicker

THE FAMILY'S THOUGHTS ON THIS
** Quit rubbing it in. HGO must be starting to feel very miffed.**

16. This is a different resource, an extremely high quality resource, and we have taken the opportunity to get our foot in what is an extremely large, and what is probably a future Queensland in NSW, in an area where there is very little gas supply right now for gas fire power.

THE FAMILY'S THOUGHTS ON THIS
** Quit rubbing it in. The geese must already and finally realised that they have been cooked.**


17.Gas fire power is going to a very good opportunity Australia to go forward in a ‘carbon constrained” or “carbon light” world

18.Disposal of Timor Sea assets is progressing

19.We also talked about selling 9% of GLNG

20.Largely, marketing now done is for the first LNG train. But now we are thinking of marketing for future trains as well

** THE FAMILY’S THOUGHTS ON THIS :

So, they probably have plans to take the coal seam gas from NSW to Queensland **


21.We have other assets as well, Adrian, that we think may be better in other peoples’ hands


** THE FAMILY’S THOUGHTS ON THIS :

We recognise a quality asset when we see one, and we are selling off some of the rubbish that we currantly have to get our hot sticky hands on these NSW assets **


22.Also we consider what is in our strategic core, and in this particular case, this coal seam gas opportunity in a basin where we already have a very good position, to put us in a position where we would have basin mastery of the whole basin is an opportunity which would be very foolish to pass



** THE FAMILY’S THOUGHTS ON THIS :

Thank God we got in before AGL or Shell **


QUESTION FROM GORDON RAMSAY, OF UBS

a. Certainly power generation and supplementing Cooper Basin supplies makes a lot of sense. But I struggle with the LNG side of it. Are you specifically saying that the LNG will be used for a project in NSW or is there a possibility of thaking it up to Queensland.


23.There has been some rumour in the press that we were nosing around Newcastle – that’s PROBABLY CORRECT. But we haven’t done a major study on how we would do LNG from these assets, but it is clearly a possibility if we could find a good export site.

24.Our FIRST FOCUS IS TO PROVE UP THE RESOURCE and see what we have got and how much it will cost to develop. It is clearly a resource of ENOURMOUS scale. 52 tcf is a very big number, so it is about proving up that resource.


** THE FAMILY’S THOUGHTS ON THIS :

Thank God we got in before AGL or Shell. and many many thanks to Gastar and HGO. Whoever said that you only get a chance to do business with Allen Bond once in a lifetime **

25.We have enough gas in the Petronas joint venture to basically deliver us two trains.

26.It is 800 km to Gladstone and that is a very long way, so it is not something we have thought about

27.Our thinking is about getting involved in a very high quality resource, one we believe will match Queensland’s


THE FAMILY'S THOUGHTS ON THIS
** Quit rubbing it in. HGO must be starting to feel totally ripped off.**


QUESTIONS FROM STUART BAKER, MORGAN STANLEY

I guess the obvious question is this, it seems to me with your position next door, it is pretty logical what you have done. You probably had a knowledge advantage.

I was curious why you would not lock up the entire resource right now, given this opportunity, particularly given what we saw in Queensland, where there were bidding contests, particularly in QGC which unfolded and obviously they ran away.

If Eastern Star beef up their reserves, you clearly cannot take the risk that someone else does not come in and bid an outrageous price and get control, in which case you are there as a minority participant and you may not have the right to deal with the gas as you want.

28.All we wanted to do here was to have a collaborative agreement with Eastern Star. They had two parties who were interested in stepping out in Hill Grove and Gastar. The opportunity for the whole company was not on the table.

29.We are also building on our previous experience with QGC where we went for the whole thing and we were unsuccessful

30.It is not our intention to go for the whole company at all



** THE FAMILY’S THOUGHTS ON THIS

And pigs may fly, quack quack, but the truth is that we are so bloody scared of starting a bidding war right now, before we have sold those assets we intend to sell to have some cash in our war-chest to make a full takeover bid for Eastern Star **:



QUESTION FROM MARK GREENWOOD OF JP MORGAN

a.First question, the acquisition of Gunnadah gas in the March quarter, how much was that

31.It was a very minor amount, small sum.

b.Could you announce the time-table for the appraisal of these fields just to let us know when we can see some tangible results

32.We are doing 25 wells on our site, Eastern Star has got the pilots going, as you know. We will be looking to continue their pace of approval.

33.We will start converting our resources into contigent reserves. Might even manage some bookings this year.

THE FAMILY'S THOUGHTS ON THIS
** So brace yourselves for a reserve upgrade shortly **

34.We are looking to collaborate our programs so that we can accelerate our programs.

c.The Bohena seam and the Huskisson seams, from the core holes that you have done to date, what have you found to be most promising? Is it similar to what Eastern Star is looking at?

35.Obviously we would not have gone into this transaction if the results from our wells had not been on the good side. Our wells have been core holes, so we know the coal thickness,, we know the gas content. Eastern Star are further down the learning curve, they have production. I don’t think they have announced the gas rates from the production

36.Putting the whole thing together, very thick coals, clearly the gas that you can get from the coals as well, this is an extraordinary opportunity to get your foot on what is BY ANY STRETCH OF THE IMAGINATION AN ENORMOUS RESOURCE.

37.In terms of oil, this is equivalent to circa 8 – 9 BILLION BARRELS. If you convert to oil terms, you begin to realise how massive this is. These opportunities don’t come around often, Mark, they really don’t. WE FELT WE COULDN’T LET THIS FISH SWIM BY without having a crack at it, and both Hill Grove and Gastar were keen participants with the support of Eastern Star.. I won’t die wondering


** THE FAMILY’S THOUGHTS ON THIS :

Thank God for the great Financial Crisis. Thank God these two mugs were so strapped for money that we got a steal. Please God, please please keep AGL and all those other crazies away just this once.. I don't want to die wondering.

And why won’t you die wondering, Mr Knox. Perhaps you had to move because there is another shadow on the horizon. It is a fact that one cameleer has already appeared, the other two cannot be far behind **

d.And what about the CO2?

38.The CO2 comes from the volcanic. We are beginning to understand which areas to drill, and where the volcanic are. The CO2 does not come from the coal, it comes from the volcanic. We will avoid drilling the volcanic. This is a vast property.


e.In terms of access to land, how do you think you are placed there for the locals?

39.The advantage of working with Eastern star is that Eastern star have a very good reputation in this matter, particularly with their Chairman, Mr John Anderson, who is a local himself.

40.A lot of the acreage is in State Forest and that is helpful. Some of it is in farmland.

41.This is an opportunity to get carbon light energy from coal. I cannot say that it is “Clean”, but it is “Carbon light.”, and we leave the majority of the coal, which is the carbon, in the ground.

42.These are 8 inch holes that we are drilling.


QUESTION FROM JOHN HEGIE OF DAUTCHERBANK


a.The gas will initially be used for domestic purposes. Would you look at swopping gas, and is that something you would consider? Would you divert some of the gas for domestic purposes in Queensland to LNG, and replace that with gas from NSW

43.Yes, I am sure the traders in our firm will be working on all these angles to maximise our ability to supply gas for LNG in Queensland, while at the same time supplying the domestic market in Queensland and NSW. This gives us an awful lot of options.


QUESTION FROM SCOTT ASHTON OF BBY LTD

a.If you are looking at LNG export option via Newcastle, and you have stated that you wanted to work collaboratively, how would you envisage that working with AGL, seeing that there is a whole bunch of protection acreage ahead of that and

b.If there is an LNG option for export from Newcastle, what is your view on gas prices in the southern states. Is this part of Santos’s strategy of lifting gas prices.

44.LNG from Newcastle is only in the contemplative stage so I cannot comment on any matters around AGL.

45.I don’t expect gas prices will rise because there is so much gas.

46.The size of the gas market in the eastern states will grow considerably as we move to a lower carbon economy and use gas in gas fired power, and obviously, as a big supplier of gas, we will be an enormous beneficiary of that.

c.Would you discount ever an LNG option from Newcastle

47.No, I would not discount that as an option for the future.

48.What we have done here is another big strategic move, TO GET OUR FOOT INTO A REALLY HIGH QUALITY COAL SEAM GAS RESOURCE, WHICH PEOPLE WILL FIGHT TO DIE FOR AT THE END OF THE DAY,

49. And we got in early..


** THE FAMILY’S THOUGHTS ON THIS :

We got in early in Queensland gas and lost out. We will do our utmost to not lose this one. And oh yes, thank you Lord, once more, for crossing our pathway with Hill grove and Gastar. **


QUESTION FROM STEWART BAKER OF MORGAN STANLEY

a.Are there any regulatory issues

50.We don’t believe that there are any regulatory issues



QUESTION FROM ALEX MEERES OF SCHROEDERS

a.My question is regarding pricing, and how it was determined and what is the process in terms of purchasing these assets.

51.The pricing was actually quite easy to observe because Eastern star trades and their major assets are these assets in the Gunnadeh Basin, and so we were able to infer a value for the Gastar stake from that and IT WAS ACTUALLY AT A DISCOUNT TO THE INFERRED VALUE because it wasn’t a controlling piece.

52.And then we paid a small premiumfor the eastern star shares above the prevailing Eastern Star price, recognising the significance of the stake that we took.


** THE FAMILY’S THOUGHTS ON THIS :

God, we would love to do business with Hill Grove and Gastar everyday, and that is a fact. You only get one chance to do business with Hill Grove and Gastar together in a lifetime. And isn't it strange that the share price did not go up one little bit while we were negotiaing. In fact, it went down. ASIC is sure doing a good job of things, and the good Lord is lending a helping hand **


b.Was it a competitive price and who approached who?

53.These were both unilateral transactions initiated by Santos



** THE FAMILY’S THOUGHTS ON THIS :

God, we really really mean it. We would love to do business with Hill Grove and Gastar everyday, and that is a fact. You only get one chance to do business with Hill Grove and Gastar together in a lifetime. I feel lucky. what is the OZ lotto price now?? **


54.What we believe we have done today is a BIG MAJOR STEP for us in helping us get our foot on some VERY VERY HIGH QUALITY RESOURCEs IN THE GUNNADAH BASIN TO MATCH QUEENSLAND



** THE FAMILY’S THOUGHTS ON THIS :

Hey, maybe we should stop rubbing it in so much. We are beginning to hurt for Hill Grove and Gastar

We are very worried that AGL, Shell and BG are slightly more clued up than the mobs at Hill Grove and Gastar. So we are all sitting here with our fingers crossed, and we want to reiterate that anyone coming close to Eastern Star is not going to be liked by us.

So everybody else, please go away **

Blessing of the Lord
MLA