The real issue at Santos

Be it ever so humble there's no place like home! If Santos, the Adelaide-based oil and gas producer, is ever looking for a motto (or even a company song), that's it – a 150 year old hymn praising the comforts and safety of home-sweet-home.

It won't happen, obviously. There's too much corporate pride involved, and the words cut too close to the bone.

But, what's just happened at Santos has the appearance of a company which left its sheltered existence as a de-facto arm of the South Australian government only to find that the wider world is a much tougher place than Australia's self-proclaimed lifestyle capital, Adelaide.

A series of recent events at Santos, including the arrival of a mystery Chinese shareholder, was capped by the creation of a new supreme management committee which will see all senior managers return from interstate and international operations to Adelaide.

In a way, the new shareholder and the rush home has echoes of 1979 when another raider, the late Alan Bond, snatched a 36 per cent stake in Santos, only to be defeated by a pure-Adelaide rebellion when the SA Government passed a law protecting the company from takeover, largely as a way of ensuring that the Cooper Basin oil and gasfields supplied SA first.

For the next 29 years Santos was tied to South Australia's apron strings before breaking free and embarking a series of national and overseas expansion projects, including investment in LNG production in waters off the Northern Territory, in PNG and in Queensland.

The latest oil-price crash exposed the folly of expanding too fast and too far from home, and into high-risk developments such as Queensland LNG, which is based on low-value coal-seam methane as its feedstock.

Rather than blossoming on the international stage, Santos became a train wreck, eventually forced into an embarrassing $2.5bn discounted share issue last year as part of a $3.5bn rescue package which included asset sales to retire bloated levels of debt.

From a share price high of $17.80 in mid-2008, and $13 less than two years ago, Santos crashed to a low of $2.46 in mid-January, well below the price of the new shares issued just two months earlier priced at $4.10.

Even today, with a closing share price of $3.69, Santos is trading at a discount to the share issue which was made around the same time then chief executive, David Knox, was replaced by Kevin Gallagher, the man who has decided that it's time to re-start the clock with a return to Adelaide.

The new seven-man leadership team will form an Executive Committee (Excom), with all positions Adelaide-based despite the company's most valuable assets, a stake in the ExxonMobil led PNG/LNG project, and the Gladstone LNG project being located elsewhere.

Also located elsewhere is the major new shareholder of Santos, a largely unknown Chinese gas retailer called ENN Ecological Holdings, which last week acquired an 11.7 per cent stake in Santos from another largely unknown Chinese company called Hony Capital which had bought into Santos during last year's capital raising.

Why Hony flipped its $US750m stake in Santos less than six months after acquiring it has not been explained, nor has the exact price in Australian dollars been revealed, though it is believed to be around $4.80 per Santos share.

ENN is believed to be interested in Santos as a future supplier of LNG, which could make it a natural investor in the stock.

Unfortunately, the history of Chinese investment in Australian resources has not always been a happy one, and other shareholders in Santos will have to wait to hear from ENN, or Gallagher, about what might be expected from the relationship.

The official position from Santos is that the changes underway, including the new Excom management structure, are part of an ongoing cost cutting exercise which should help the company's financial performance.

But the real issue at Santos is that it desperately needs an increase in the oil price to restore profitability, and its minority shareholders would very much like to know more about ENN and its intentions now that it dominates the Santos share register through a corporate vehicle with the the delightful name of United Faith Ventures, registered in the British Virgin Islands.

The name and address chosen by ENN for its Santos stake appear to indicate that the Chinese company has no intention of making Adelaide its home and might have created a structure to make a quick sale – if/when the oil price recovers.