February 21, 2018 / 3:42 AM / 24 days ago

Breakingviews - Revived Santos can turn from prey to predator

SINGAPORE (Reuters Breakingviews) - Santos could shift from prey to predator. Full-year results show the Australian gas producer is on the mend, with a narrowing net loss, less debt and more cash. That vindicates last year’s rejection of an opportunistic private equity-backed bid. The next challenge is shifting to growth - which could send the $9 billion group hunting for deals.

The logo of Australian oil and gas producer Santos Ltd is pictured at their Sydney office February 15, 2016. REUTERS/Jason Reed/File photo

It has been a two-year recovery, but even with headline 2017 numbers slightly below expectations, Santos looks the picture of health, compared to when it was burning cash and eventually had to turn to shareholders to shore up its capital position. Wednesday’s earnings showed net debt, $4.75 billion at the end of 2015, closing in on an end-2019 target of $2 billion. Free cash flow tripled. This is not just about riding a recovery in energy prices: Santos has streamlined effectively too.

A venture with Chinese shareholder and natural gas distributor ENN Ecological, announced on Wednesday, could also boost Santos’s hand in China, which is already the second-largest liquefied natural gas importer. Demand will rise as millions of Chinese households switch from coal. Unlike some other markets which rely largely on long-term LNG contracts, China will buy more gas in the spot market, meaning Santos will be able to take advantage of price swings.

The recovery makes Harbour Energy’s A$4.55-per-share proposal bid in August look especially opportunistic. Santos was trading on Wednesday at around A$5.05. That is not far below the A$5.30 revised level Harbour was reported to be considering late last year, although the mooted second bid never appeared.

The Adelaide-based outfit is now able to move beyond fire-fighting. Santos already has options to grow – by investing more in its juicy assets in Papua New Guinea or the Barossa field in Australia, for example. It could also countenance using a rebuilt balance sheet to follow rival Beach Energy, which tripled its oil and gas reserves with the A$1.6 billion acquisition of Lattice Energy last year.

It will be tougher for Santos, which is a bigger company, to find such a transformational deal. A healthier market will also make many potential sellers less willing to transact. But smart dealmaking - perhaps picking up new interests in Papua New Guinea, for instance – would help Santos’s shares get past the phantom second bid price and give it a stronger standalone future.


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