Santos rejects Harbour and goes alone

Santos has rejected Harbour Energy's upped bid of US$5.21/share (A$6.86) - we expect Habour has given up on Santos for now having made a number of failed approaches and putting forward fairly full bids.

Harbour re-approached in April 2018 with a bid of US$4.98 (A$6.50) subject to due diligence, funding and unanimous recommendation from the Santos board. This bid was at a 28% premium to the prevailing share price and a 43% improvement to the A$4.55 bid made in August 2017.

Following engagement with Santos in April and May, Harbour returned with its "best and final" bid of US$5.21. Santos cited the following reasons for rejecting this bid:

• Increase in Brent which has lifted the share price of its peers on the ASX
• Acquisition would be highly levered and require Santos to enter into hedging prior to transaction close to support Harbour's financing efforts
• Restriction on conduct of Santos' business from time of entering the Scheme Implementation Deed
• FIRB approvals
• Offer in US$ with Santos shareholders bearing the risk of fluctuations in the A$/US$ exchange rate

Ultimately, the rejection by the board is down to price and the recent rally in Brent has supported their argument.

Santos will now have to go alone and demonstrate to shareholders that it can independently create value. The board has put out strong messages that it will be able to do so with the company now entering strong cash flow generation territory and reduction in the company's debt significantly ahead of initial targets.

Harbour Energy is a private equity vehicle backed by EIG Global Energy Partners.

ENN/Hony hold c.15% shareholding in Santos and under its shareholding agreement, is obliged to vote in agreement with the majority of the Santos' board on matters of control.

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Papua New Guinea LNG force majeure a week after expansion plans announced

ExxonMobil has declared force majeure on PNG LNG after Papua New Guinea was hit by a 7.5 magnitude earthquake on Monday. The partners in the plant, which exported 7.8 million tonnes last year, are ExxonMobil (33.2% operator), Oil Search (29%), State of Papua New Guinea (16.8%), Santos (13.5%), JX Nippon (4.7%) and Mineral Resources Development Company of Papua New Guinea (2.8%). Latest reports are that the pipeline and liquefaction plant sustained minimal damage, but could potentially be another six weeks before it can be restarted.

This comes a week after the announcement by the upstream partners in Papua New Guinea’s giant gas resources to more than double the country’s liquefaction capacity to 16mmtpa at a cost of USD13 billion. The partners are planning to help add a further three trains in the country – one to support growth at ExxonMobil’s P’nyang field, and two to service new gas from Total’s Elk-Antelope development. FEED is planned to start later this year, but will require agreement of terms with the PNG government first including domestic supply obligations.

Given this is a brownfield expansion, it is significantly cheaper than the original USD19.5 billion construction cost of the project. The partners were previously toying with the idea of having a separate facility for Elk-Antelope gas as Total and ExxonMobil could not reach agreement. ExxonMobil was pushing for the gas to go through PNG LNG supported by train expansions, while Total was considering a new plant (Papua LNG). While the details on the new three trains remain high level and could still see a separate Papua LNG project, this agreement thaws the development discussions which have been frozen for more than a year. The separate trains supporting the different upstream gas sources will also be conducive to structuring and financing of the proposed project – avoiding the complexity involved with unitisations and co-mingled gas marketing. The new LNG could come onstream by the early 2020s and would arrive in time for an emerging LNG supply gap that is foreseen by the industry.

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