What former ESG board member and current HGO MD David Archer realised about ESG is THERE IS NO MIDDLE GROUND. And so he acted accordingly.
DA knew that, when Santos came a-knocking earlier in the year, the writing was on the wall for ESG. They were either going to get taken over within 18 months, or, if not, it would be a long process of becoming an enormous independent gas producer. A huge resource, lots of capex, dilution etc.
Shareholders of ESG should realise this too. There aren't mid-cap LNG producers. Nor are there mid-tier vertically-integrated energy companies. You either get big - REALLY BIG - or, you get eaten by someone who is really big.
All the ESG board know this too. No one really believes ESG will be developing their own LNG out of Newcastle. No one. But they are proving a huge resource and reserve, and forwarding the approvals, so that they can command a premium price. A bit like getting plans approved for a property development, and selling the undeveloped property WITH PLANS. Add value, then hand it over to someone who has the size and experience to take it to the next level.
But somehow, talk of an ESG takeover is thought by some to be wishful thinking. Like hoping for the Lotto to come in.
Not so. I was reading The Weekend Australian this morning, and comparing a list of the top 10 resource companies from 10 years ago. Now the big boys are still there, and they are EVEN bigger. But the others...? Gobbled up. Up the food chain. It is the way it has to be.
Especially in coal-seam gas. Now you can be a small oil producer, who has a number of small oil wells, that 'leak' out oil in small amounts. And you dutifully collect it, sometimes through plastic pipes, and collect it in a little truck.
But a small CSG producer? No. You either find something decent and grow, to then be taken out by a bigger fish, or you continue to burn cash looking, and exist only by virtue of going back to your long-suffering shareholders for more cash.
But ESG already has a large quantum of gas. So they will not fall into the latter category of the ever-hopeful explorer. That point of no return has already been past. They would not have even been looked at by the likes of Santos and TRUEnergy if not.
So, it should be apparent to all that it is not a question of 'IF' ESG gets taken over, but 'WHEN'. No one seriously questions that ESG have got the gas. Lots of it. And perhaps you may be of the view that there are better uses for your money elsewhere, and a takeover will happen, at some distant point in the future, a point further than your investment horizon stretches. If you think this, I will not argue with you. That view at least makes logical sense.
But to deny that ESG will be taken over at some point is akin to being a member of the Flat-Earth Society. The food chain has very few big predators at the top, and lots of 'the eaten' down the bottom.
So back to David Archer. He has forgone 'the middle ground'. HGO will not benefit from any organic share price growth of ESG. HGO have taken the cash to develop their own projects in a rising market, and will get nothing more, OR, they get the cash, with additional big pay-off of a takeover within the 18-month timeframe.
No middle ground here.
So ESG is drilling, and pumping their pilots, and adding to their scoreboard, as fast as they can. And they are drawing up big plans, and forwarding approvals, and talking to folks about gas swaps and pipelines and offtake deals. And, they have gotten an expert M&A guy on the board, fresh from one takeover, and currently involved in another.
And they are doing so without any marketing department, because why would you put yourself out for sale, and draw attention to yourself, before the serious runs are on the board?
But, there will always be members of the Flat-Earth Society, who can't see what the rest of us can: that there IS a food chain, there is no mid-tier anymore (and certainly not in LNG), and that ESG will at some point, probably in the not too distant future, not exist as a separate company anymore.
Merry Christmas and Happy New Year All.
Y
ESG Price at posting:
75.0¢ Sentiment: Buy Disclosure: Held
