May 23, 2018 / 3:05 AM / 5 months ago

Breakingviews - Santos gambles on crude with $11 bln bid rebuff

SINGAPORE (Reuters Breakingviews) - The new chairman of Santos is all-in on energy prices staying high. On Tuesday, Australia’s second-largest independent gas producer rebuffed suitor Harbour Energy, after nine months and a string of proposals. Chairman Keith Spence’s snub of Harbour’s final $10.8 billion bid seems optimistic.

Harbour, led by former Royal Dutch Shell executive Linda Cook, planned to use Santos to build a liquefied natural gas (LNG) powerhouse. The private-equity backed investment vehicle made its first opportunistic move at A$4.55 per share in August. It ended on Monday at nearly A$7.00, or more than 50 percent higher, with the single largest shareholders onside. But an accompanying energy rally proved Harbour’s undoing: since August, Brent crude oil has risen from about $52 to nearly $80 a barrel.

Spence is right the offer carried risks: Australian authorities, who are jumpy about energy security, might not approve the deal. While shareholders would be happy to cash out, the remaining private group would be burdened by significant leverage, which might also worry regulators.

But the price looked good. An enterprise value of roughly 8 times this year’s expected EBITDA was close to the forward EBITDA multiple at which Woodside Petroleum, a larger and more financially secure peer, trades. The company’s bosses have proved adept fire-fighters, cutting costs and slashing debt, but have yet to demonstrate that they are equally good at chasing growth, which requires a different set of skills. Fundamentally, too, there is no guarantee that the energy boom will not fizzle out again, sending Santos shares tumbling once more.

If that happens, Santos could come back into play – only at a lower price. It is a rare prize: a reasonably bite-sized business, whose interests in Papua New Guinea give it access to cheap gas within easy reach of North Asia’s booming markets. Harbour’s current offer would look like a missed opportunity.

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