Santos and TdU

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    Which ever way this is cut, it won't be good news for either Santos or the future sponsorship of the Tour.





    Santos was deemed to have lost its way, largely because of a weak balance sheet and poor downside planning, which had been exposed when oil prices more than halved. Photo: Dean Sewell

    Prince Abdul Ali Yil Kabier, the money behind mysterious investment bank Scepter, is a skilful polo player who is a regular on horseback at the Royal Brunei Polo and Riding Club at Jerudong, in a lush part of north-west Brunei.

    Thousands of kilometres away in leafy Adelaide and astride a different type of steed, John Ellice-Flint, a former chief executive of oil and gas company Santos, had been increasingly fuming on his regular 70-kilometre-plus bike rides through the Adelaide Hills and along the coast.

    Ellice-Flint, who was shunted out of Santos in March 2008 after eight years at the helm, was angry at the way Santos had been managed in the past few years, leaving it extremely vulnerable to a sharp oil price downturn.

    So extreme wealth, revenge and the chance to pick up the downtrodden corporate jewel of Adelaide for a steal were all on the menu at a secret meeting at celebrity chef Luke Mangan's Glass Brasserie in the Sydney Hilton in September.

    Ellice-Flint was at the table, along with Anthony Steains, a well-connected investment banker from Hong Kong who was the front man for Scepter Partners, a fund backed by nine of the world's wealthiest royal families and other high-net-worth individuals with combined wealth of $140 billion. A third dining partner was Alan Young, from Highbury Partnership, who previously headed JPMorgan's oil and gas investment banking team.

    An in-principle agreement to proceed with the final plans for a tilt at Santos were locked in. After vigorous handshakes all round, a bottle of an iconic South Australian shiraz, the Rockford Basket Press, was ordered.

    [h=2]Restore the fortunes[/h]Ellice-Flint was on board to try to restore the fortunes of a company he and Scepter believed had clearly lost its way, largely because of a weak balance sheet and poor downside planning, which had been exposed when oil prices more than halved. The Santos share price had plunged from $15.32 in August 2014 to a 15-year low of $3.95 just a few weeks ago, as the $9 billion of debt weighing on the balance sheet increasingly became anathema for investors.

    The backers of Scepter have access to pipelines of unbelievable wealth. With links to the royal families of Brunei and the United Arab Emirates and several other countries that have benefited from streams of oil royalties and vast property empires during the good times for oil, they are rolling in cash. A $6.88 a share indicative offer became public on October 22, when the Santos board, led by chairman Peter Coates, announced it had rejected the overture made little more than 36 hours earlier.

    Scepter, which is headquartered in Bermuda and also has offices in New York and Beijing, has backers including the royal family of Brunei through Prince Kabier, and the United Arab Emirates' Sheik Juma Al Maktoum, a senior member of the ruling Al Maktoum family in Dubai.

    Prince Kabier is the chairman of the board of stakeholders at Scepter, which in practical terms means he is over-arching boss for all the royal families involved in the firm. There is also a powerful traditional board of directors at Scepter that includes former HSBC and Vodafone chairman John Bond.

    Ellice-Flint was the pioneer of the coal seam gas-to-LNG concept in Queensland and it was his strategy that led to Santos being one of the main players in building a large LNG plant at Gladstone in Queensland, turning the company from being domestically focused on the Cooper Basin in northern South Australia to one exporting LNG to the world. After running Santos for eight years, he was replaced by Scotland-born David Knox, formerly of BP.

    The share price rout of the past few months claimed Knox, with his departure announced in August and set for 2016. Ironically, the taps were turned on at the $US18.5 billion ($25.5 billion) GLNG plant in September after years of planning and construction, but the returns will be much skinnier because LNG prices are linked to oil prices.

    [h=2]Centre of events[/h]One man at the centre of events in the early days was Stephen Gerlach. He was chairman of Santos for eight years until December 2009 and headed the boardroom when the LNG plans were being progressed and the change was made to anoint Knox.

    He told AFR Weekend pursuing the LNG expansion had been the right strategy and that Santos had been a victim of the falling oil price, as had many other companies. Gerlach also says the Scepter proposal is at a low-ball price and very opportunistic.

    "I would say it is ridiculously priced," he says.

    Gerlach, who was one of the agitators for the 2008 removal of a 15 per cent shareholder cap on Santos, which had previously made it takeover-proof, has no regrets about the cap coming off. It was put in place in 1979 to prevent corporate raider Alan Bond from taking control of vital oil and gas resources in South Australia, considered integral to the development of the state.

    "It was the right thing to do for Santos," he says of the cap removal.

    But he concedes it will be a blow for the state and Australia if Santos is taken over.

    "Obviously it's important for Australia and South Australia to have a vibrant oil and gas company located in the state.

    "The real question is what might a new owner do with the operating assets."

    [h=2]Finger on the pulse[/h]Ellice-Flint, who is extremely fit and vice-president of the Chiton Rocks Surf Life Saving Club to the south of Adelaide, has kept his finger on the pulse in oil and gas over the past few years as chairman of ASX tiddler Blue Energy, which has a market capitalisation of just $31 million. It is largely a coal-seam gas explorer.

    Steains has been a key player in Scepter's approach to Santos and is one of the top deal-makers in Asia, having worked previously at private equity firm Blackstone. He had built close links with Ellice-Flint over the years.

    Scepter was set up in June 2015, after being spun out of a larger global entity called BMB Group, which had been built up by sharp chief executive Rayo Withanage. He has moved across to run Scepter but Steains is the prime mover on deal-making.

    Scepter wants to use Santos as a launch pad to future growth in Asia and make it the vehicle for more acquisitions.

    News of the Scepter approach was followed on Friday with a long-expected merger deal between Cooper Basin players Beach Energy and Drillsearch Energy. But in a sign of the pummelling the sector has taken, the $1.17 billion market cap of the combined company will be little more than two-thirds of Beach's market cap 12 months ago. Woodside has also made a play for Oil Search in yet another bid to take advantage of the oil price slide.

    South Australian Premier Jay Weatherill says his main focus is in ensuring that whoever is the owner of Santos, they are interested in developing the state's natural resources. A $100 million legally enforceable compensation mechanism payable to the South Australian government should there be a significant reduction in corporate presence by Santos in the state was insisted upon by then-Premier Mike Rann in the 2008 deal to remove the shareholder cap.

    [h=2]Integral component[/h]Another integral component of those negotiations in 2008 was a community benefits fund, where Santos was forced to spend $60 million over the next 10 years on a range of sponsorships. The highest profile is the Santos Tour Down Under cycling event each January, which is televised around the globe and attracts big names in world cycling. Santos is also a big sponsor of the OzAsia Festival, an arts festival with strong links to Asian countries, the Art Gallery of South Australia, and the Adelaide Symphony Orchestra.

    ​Pengana fund manager Tim Schroeders sees the Scepter approach as marking a milestone in the market cycle, showing some investors are prepared to back valuations with hard cash.

    ​"There was a disconnect between the valuations out there in the market for some of these companies and the share prices and that chasm was growing ever bigger up until this month," he says.

    "At least we are getting to a point where people are prepared to pay real money backing those valuations."


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    Santos already sponsor the Tour, so if the takeover is unsuccessful I can't see them discontinuing it, and if the takeover IS successful, it sounds like Ellice-Flint is a keen cyclist so will be keen to continue as well.


    Obviously as one of the few - possibly only - Head Offices of large companies in Adelaide, any job losses at Santos are not good news for the state in general, but I would be surprised if the sponsorship of the Tour is under serious threat.


    I heard a rumour the other day that the GP may be coming back to Adelaide too....

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