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Harbour makes final Santos offer

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LNG Industry,

Bloomberg is reporting that Harbour Energy Ltd. has made a final sweetened bid of US$10.9 billion for Santos Ltd., claiming support from the Australian oil and gas producer’s biggest shareholders.

US-based Harbour improved its bid 4.6% and indicated it could be raised further if Santos expanded its oil hedging program, the Australian company said in a statement on 21 May. At US$5.21 per share, or the equivalent of AUS$6.95, it is an 11% premium to 18 May's close.

Santos continues to trade below the offer. Shares in Sydney rose as much as 3.4% to AUS$6.46 after the bid was revealed, then pared those gains following Harbour’s announcement that it was “best and final,” trading up 1.7% as of 1:50 p.m. local time. The benchmark S&P/ASX 200 Index was little changed.

Harbour’s takeover blitz has faced criticism that it has not accounted for the roughly 12% gain in Brent crude future since the original offer 29 March. As well, there are concerns that foreign investment review may sink any deal as Australia’s struggle to ensure sufficient natural gas supply has raised sensitivity over control of domestic producers.

“We’ve still got uncertainty around the pricing environment around oil,” Adrian Prendergast, a Melbourne-based analyst at Morgans Financial Ltd., said. “Given that uncertainty, we think it’s a really good offer.”

The stock is trading below the bid largely because it is not clear how the Santos board views the proposal, and any agreement still needs foreign-investment approval in Australia, he said.

The revised offer is conditional on Santos undertaking additional hedging of oil-linked production in 2018 of about 30% and changes to hedging in 2019, according to the statement from Santos. Harbour could increase the offer to US$5.25 per share if Santos agrees to hedge 30% of oil-linked production in 2020, according to statements from both companies. Typically, producers use hedging programs to lock in future sales through derivatives linked to the price of oil.

The additional oil production hedging requirement will enable Harbour to reduce transaction costs and increase the offer price, Harbour said in its statement, adding that it is not required to support its financing. The offer also has support of ENN Group and Hony Capital, it said. The Chinese companies hold a combined 15.1% of Santos.

Harbour last week offered US$4.98 per share for Santos – its bid unchanged following five weeks of due diligence – prompting the target to close down 1.9% in Sydney trading on 17 May. Santos told investors earlier this month that it may be worth "substantially more" than Harbour’s original proposal because of a rise in oil prices.

Harbour Chief Executive Officer Linda Cook has said she would seek to expand Australia’s third-largest energy producer in Asia and Africa. She would also look to grow its gas assets in South Australia’s Cooper Basin, the ConocoPhillips-operated Darwin LNG plant in the Northern Territory and in Papua New Guinea.

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