The Gladstone LNG operator yesterday confirmed it had rejected a $4.55/share takeover bid back in August by Harbour, run by former Shell lifer and CEO hopeful Linda Cook and backed by EIG Global Energy Partners, the major shareholder in Senex Energy.
Santos surged 13% yesterday, and was up again this morning trading at $5, the first time it's broken that barrier since April 2015, when it had plummeted from $13.14 in September 2013.
However, Santos denied it was having any more conversations with them despite Fairfax reports that the US firm was working on a higher bid.
It wasn't the first time a foreign entity has taken a strategic interest in Santos, whose heavy LNG exposure in Gladstone, Papua New Guinea and Darwin is attracting all sorts, having rebuffed an all-cash bid at $6.88/share from UAE-backed Scepter Partners in 2015.
Santos has since doubled its shares on issue, divested assets, improved its capital structure, cut its costs and its debt, while sentiment in oil and LNG markets has also shifted significantly, to say nothing of the domestic gas markets on Australia's west and east coasts which the Adelaide-based oiler services.
Santos' share price surge to within 7% of Harbour's reported possible revised bid price of $5.30/share won't help the US firm's chances, but RBC Capital Markets says that's only the start of the potential stumbling blocks of any future upgraded bid.
A scheme of arrangement, the vehicle under which Harbour made its offer, generally requires 75% minimum shareholder support, so RBC said the support of Santos' major shareholders ENN and Hony Capital which jointly hold about 15% of the GLNG operator is "almost critical" to a successful deal.
"The terms of the Santos and ENN/Hony strategic relationship appear to largely preclude ENN/Hony from going against a board recommendation regarding a change of control transaction provided the deal pricing is above its average entry price," RBC's Ben Wilson said yesterday.
"While we do not know the exact weighted average entry price of the two, we think it is reasonable to assume it is below the reported revised possible bid price of $5.30/share.
"We base this on Hony having transferred its shareholding to ENN at a notional price of $4.85/share and then purchasing further large stakes at prices below $4/share in 2016 and 2017."
Then there are the aforementioned Foreign Investment Review Board issues, previously flagged by Slugcatcher in regards to Hony and ENN's increasing stakes in Santos.
Santos operates significant gas infrastructure in Moomba, Gladstone and central Queensland, and its deals with the likes of Pelican Point gas-fired station and others have been critical in the federal government not "pulling the trigger" on the threatened Australian Domestic Gas Security Mechanism.
Thus any foreign-based takeover will likely invite FIRB scrutiny.
While this would be a complication, RBC does not foresee major issues providing the acquiring entity is sufficiently well funded and experienced and will continue to invest in the east coast energy development.
"The federal government has shown its willingness to enact legislation to limit gas exports should it be required, hence it has the regulatory powers to intervene if appropriate rather than rejecting foreign ownership of gas infrastructure," Wilson said.
Santos' board is also in a transitional phase, with current chairman Peter Coates set to retire in February, to be replaced by former Woodside Petroleum CEO Keith Spence.
While all board members are bound by a duty to represent shareholders and other company stakeholders, RBC also sees Santos' board transition is a potential complicating factor to fully engaging with a potential bidder.
"We think confirmed reports of a previous indicative bid for Santos from Harbour Energy and a possible higher future bid offer further evidence of rapidly improving sentiment towards the back end of the oil curve and to a recovering LNG market driven by strong Chinese demand," Wilson said.
"It also highlights Santos' strategic assets in the form of underutilized assets in the Cooper Basin and within GLNG."'
RBC has a $4/share discounted cash flow valuation and price target for Santos, premised on the bank's US$64/bbl (A$84/bbl) real long-term Brent oil assumption.
