Punters chased Santos shares for all they were worth yesterday after the South Australian Government gave its strongest indication yet that it was considering lifting the 15 per cent maximum cap on shareholdings in the oil and gas producer.
The cap has blocked numerous approaches to Santos over the years and was put in place by a previous state government in the late 1970s to protect the company against the advances of Alan Bond.
The shares touched a day’s high of $11.88, up some 64c before easing to end around 45c up at $11.69.
The queue of companies interested in Santos is long and could include the likes of Alinta, AGL Energy, Woodside and a host of ambitious investment banks and private buyout groups.
At its present share price it has a market cap of around $6.8 billion and a 12 month high of $12.60. Any price would have to be around the $13 mark to have a chance of success.
The blocking of Bond came in 1979 when the then state government was concerned about gas supplies (Cooper Basin was then the major onshore gas source, supplying Sydney and Adelaide).
South Australia now gets gas from Queensland and Victoria states, as well as from the Cooper Basin, which is controlled by Santos and Beach Petroleum which last year beat Santos to win Delhi Petroleum’s stake.
Santos has found it difficult expanding by corporate activity with the cap in place.
It has refused to pay more than it thinks for assets like Delhi (Beach snatched it away at the last minute) while it was slow and cheap in trying to win control of Queensland Gas Co. AGL Energy now owns 29 per cent of QGC.
Santos killed off the PNG-Australia gas line project and is now looking at working with Exxon, Oil Search and others in building an LNG project based on Oil Search’s PNG gas fields.
Analysts and shareholders consider the Government will give an unqualified greenlight to the request to lift the cap.
CEO John Ellice-Flint said in the statement to the ASX that “We will be submitting to the review that the shareholding cap is no longer relevant, given the changes in the South Australian energy markets since its introduction over 28 years ago. The board and management have an obligation to our shareholders to maximize the value of their investment.”
South Australian Premier, Mike Rann said Santos will have to show “clear benefits” to South Australia from any move to lift the cap.
“A lot has changed in the past six to seven years and I agree with Santos that it’s time to look at it again,” Rann said in a separate statement.
Mr Rann said any lifting of the cap was not a done deal. “My only concern is what’s in the best interests of South Australia,” he said.
“For many years, critics of the cap have claimed that it is anti-competitive, deflates Santos’s share prices and is a restriction that doesn’t apply to any other South Australian company.”
South Australia’s minister for mineral resources development, Paul Holloway, will be responsible for the review.
The cap was introduced in 1979 to prevent Alan Bond from taking over the company and putting South Australian gas supplies at risk.
Santos’s managing director, John Ellice-Flint, said Santos would argue to the review that the cap was no longer relevant, given changes in the SA energy market since its introduction.
“During that time, Santos has also changed considerably, developing a diverse asset base with oil, gas and LNG production throughout Australia and internationally,” Mr Ellice-Flint said.
“We have also continued to demonstrate our strong commitment to the state through significant investments in our new corporate headquarters in Adelaide, and in the ongoing development of the Cooper Basin.”
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The news came as Santos held its annual meeting in Adelaide where chairman Stephen Gerlach conceded the company’s shareholder returns had been disappointing.
“2006 was a very good year for Santos from an operational perspective. We achieved production at the upper end of our target range, with output of a record 61 million barrels of oil equivalent, 9% higher than in 2005.”
“Sales revenue was up 12% to a record $2.8 billion. Over the last two years, revenue has grown by over 80%, reflecting higher total production, combined with higher commodity prices.
“Production costs per barrel decreased by 3% year on year, which was a great result in the current resources environment of generally increasing costs.
“From a shareholder return perspective, we did not perform nearly as well. Total shareholder returns for 2006, including share price performance and dividends paid were negative 17%.
“This is the first time in five years that the share price has fallen year on year and clearly this is of concern to the Board and management.
“A part of the share price under-performance can be attributed to a decline in the oil price during the year. In Australian Dollar terms, the West Texas Intermediate oil benchmark declined by over 9% during 2006. This had a negative impact not only on Santos, but on investor sentiment towards the upstream oil and gas sector generally.”
He said there were two key issues that contributed to the impact, including the downgrade of the resource estimates for the Jeruk oil field in Indonesia after disappointing appraisal drilling results and the ongoing mud-flow incident in Indonesia.
There was a hint in comments at the AGM from CEO Ellice-Flint that might help the company’s case in the review of the cap.
“Firstly, Cooper Basin Oil: This is a high value, intensive exploration, appraisal and production project which will see Santos drill 1,000 wells at a cost of over a billion dollars over the next five years.
“This opportunity is unique to Santos – we are the only company in Australia with the acreage position, infrastructure, equipment and know-how to be able
