Santos Seen Luring Bids After Rejecting $7.2 Billion Offer

(Bloomberg) -- A bid for Santos Ltd. may trigger counter offers for the Australian oil and gas producer that has stakes in some of the world’s cheapest liquefied natural gas.

The Adelaide-based company surged the most in a year after saying it received and rejected a A$9.5 billion ($7.2 billion) takeover approach from Harbour Energy Ltd. led by former Royal Dutch Shell Plc executive Linda Cook. Harbour is preparing to make another cash offer of about A$5.30 a share within weeks, according to a person with knowledge of the situation, confirming an earlier report by the Australian Financial Review.

“An opening offer is rarely the best or last action and could also awaken any number of interested parties from a slumber--think Woodside Petroleum for starters,” according to a research note from Morningstar Inc.

Santos Seen Luring Bids After Rejecting $7.2 Billion Offer

A potential bid from Harbour may also flush out a rival offer from Santos’ largest shareholders, ENN Group and Hony Capital Ltd., Evans & Partners Pty Senior Research Analyst Andrew Hines wrote in a note Thursday. ENN and Hony hold about a 15 percent stake in Santos and in June agreed to coordinate investments with the Australian explorer in upstream gas and LNG production.

Santos rejected the non-binding proposal received in August from Harbour because the price of A$4.55 a share “was inadequate and funding was uncertain,” Chief Executive Officer Kevin Gallagher said in an emailed statement. Harbour is a joint venture between embattled commodity trader Noble Group Ltd. and resources investment house EIG Global Partners.

Other Suitors

“If a credible bid is presented” then “other potential future Santos acquirers, such as existing shareholder ENN, could consider avenues to enter the fray,” Wood Mackenzie Ltd. analyst Saul Kavonic said in an email.

Santos shares, which jumped 13 percent to close Thursday at the highest since August 2016, added 1.5 percent to A$5.025 at 1:53 p.m. on Friday in Sydney. A bid of around A$6.50 a share is required for a “serious discussion,” Credit Suisse Group AG analyst Mark Samter wrote in a note.

Any deal to buy the Australian energy company would give the buyer control of the Gladstone liquefied natural gas plant in Queensland as well as an 11.5 percent stake in the ConocoPhillips-run Darwin LNG facility and a 13.5 percent holding in ExxonMobil Corp.’s Papua New Guinea LNG project.

“Harbour would be aiming for two things here and that’s their stakes in GLNG and PNG LNG,” said David Lennox, a Sydney-based resources analyst with Fat Prophets. “If you want to get two good natural gas exposures, Santos is probably the cheapest of all of them in the region.”

Santos was among the biggest casualties of the rout in crude oil prices, plunging from a 2014 peak of A$13.23 a share to a low of A$2.48 in 2016 as debt levels ballooned while it was building Gladstone.

See also: Santos Takeover Approach May Flush Out More Bidders: Street Wrap

After facing pressure from major shareholders over its strained balance sheet, Santos has emerged a stronger energy producer this year after slashing its costs and receiving regular LNG revenues from its share of the GLNG plant.

The company previously rejected a A$7.14 billion bid in late 2015 from Scepter Partners, an investment firm backed by Asian and Middle East royalty.

Noble Group owned 75 percent of Harbour Energy as of January 2017, according to the Hong Kong-based trading house’s 2016 annual report. That stake has been significantly diluted and Noble’s involvement in any Santos deal would be minimal, according to a person with knowledge of the situation.

A Noble Group spokesman didn’t comment on the Santos bid when queried by Bloomberg.

EIG executed a deal with Australian gas producer Senex Energy Ltd. earlier this year involving an equity stake and $300 million of funding for a Queensland gas project.

Noble is in the midst of a battle to survive amid a crisis marked by accounting criticisms and a collapse in its securities. The company has already sold off some of its most prized assets and there’s been speculation that it may also seek to offload its stake in Harbour.

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