Takeover-fuelled rally may nobble any Santos deal

On Thursday morning, it emerged that American investment house Harbour Energy had made a proposal for Santos in August, courtesy of a story in The Australian Financial Review.

Santos later that day confirmed the bid had indeed been presented at a price of $4.55 and had then been rejected. But Harbour is now tipped to be ready for another crack at Santos, this time pitching at $5.30 a share.

The market reaction was strong. Santos's share price pushed up more than 16 per cent since Wednesday, from $4.38 to $5.09 on Friday morning before easing back to $5.01 by the market close.

This new price point has been supported by renewed analyst research on the back of a tour of the company's operations with Santos management this week.

But this bounce may make a formal offer by Harbour difficult.

Then there is the fact the bid would also have to get past the Foreign Investment Review Board (FIRB), which would make a recommendation to federal Treasurer Scott Morrison who would have the final say on any deal.

"While we view the deal as good for shareholder value ... a revised offer has become significantly more difficult following the leak to the media," Citi analysts told investors said.

Analysts also stated that the company's significantly stronger position, coupled with a history of rejecting takeovers, having knocked back a similar takeover bid from private equity firm Scepter, may indicate it will once again reject an offer.

"The defensive approach by the board is consistent with the response to the [Scepter] $6.88 per share bid made in October 2015," Citi analysts said.

"We do not understand why Santos would reject the Scepter bid in 2015 but accept it now, given the balance sheet is fixed."

They added that Santos chief executive Kevin Gallagher's transformation of the company was not yet complete, and it was unlikely he would release the reins until he delivered his turnaround.

Harbour, for its part, on Friday maintained its silence over its intentions. Santos declined to comment.

Low bid

Wealth manager FNZC also believes the speculated proposal is still too low.

"[Our] gut feel says Santos' board is not likely to accept a bid at that level ... it doesn't really feel like the kind of price that would get a board excited," they said.

However, Institute for Energy Economics& Financial Analysis investment analyst Bruce Robertson said they are very different proposals, stating that Harbour's offer "seems to be a bit more legitimate than the Specter bid".

FNZC is also tipping FIRB troubles, pointing to the shortages for east coast customers that forced a government intervention earlier this year.

"Given the parlous state of the east coast gas market, one wonders what view would be taken of the operator of both the Cooper Basin and Gladstone LNG [GLNG] being acquired by a relatively unknown, foreign entity," it said.

If Harbour Energy's bid were accepted, it would still have to pass the FIRB, an issue exacerbated by the tightened east coast domestic gas supply.

"FIRB approval for the deal would be required," Citi analysts stated, "which could be a risk given current domestic gas markets. We also note the Treasurer can block transactions from offshore entities."

Mr Morrison's office declined to comment on whether it would support a bid but South Australian Treasurer Tom Koutsantonis has already raised concerns.

Issues 'overblown'

Mr Robertson believes domestic gas supply issues have been overblown and any offer is likely to pass through the FIRB relatively easily.

"The FIRB has been surprisingly inactive in the case of takeovers lately, opposition to the bid will be an unlikely event," Mr Robertson said.

He added that a takeover from a player outside the current market would ensure a monopoly is not created, thus avoiding competition regulator problems, and will not drastically change the field of play.

The major asset Harbour may aim for is Santos' Papua New Guinean LNG projects, analysts said.

Mr Robertson said while GLNG in Queensland and other onshore gas assets appear to be challenged, "PNG is very attractive".

"It's a low-cost asset, and can compete in a low-cost gas world, it's valuable."

He added that the prospects for its Northern Territory offshore projects were prospective.

Analysts have also pointed to the growth opportunities of Santos' Narrabri project, in NSW, although its future is dependent on the state lifting coal seam gas moratoriums.

Santos sideshow

In an interesting counterpoint, at the same time as Harbour Energy mulls a multibillion-dollar play for Santos, Norway's Norges Bank announced on Friday it would exit from oil and gas globally.

That decision will see it dump about $US65 million ($85 million), or just over 1 per cent, of Santos stock along with the rest of its $430 million Australian resources portfolio.

Fat Prophets analyst David Lennox said the Norges Bank move might be good news for Santos, easing some of the pressure the board was facing.

"Santos may finally be able to breathe again, as there is now interest in what Norges Bank is looking to divest," Mr Lennox said.

"This broader divestment may be a distraction for the market, and means that [unlike takeovers], acquirers won't have to haggle too much on price, and they won't have to pay a premium for a position in the company.

"They will only have to deal with one customer instead of a shareholder base."