“Be careful what you wish for – you might get it” is the sage advice not taken by Santos when demanding that Queensland Gas produce a credible independent expert’s report as part of its target statement in reply to the South Australian’s $1.26 a share takeover bid.

The QGC board had been particularly dismissive of the Santos tilt, arguing it didn’t even deserve an expert’s report, but this morning QGC produced a very credible valuation — $1.44 a share cash down from AGL for 30% of the company. Throw in any sort of control premium on top of that, say, just 10%, and Santos would have to be offering $1.60 to have any credibility itself.

Santos has been having somewhat more than its share of bad luck lately with an unfortunate run that started back in the 2005 financial year with the expensive Moomba gas plant fire and more recently includes the downgrading of the Jeruk field reserves, a disastrous on-going Indonesian mud flood and a loss of production from an Indonesian pipeline explosion.

Santos isn’t the pipeline operator and wasn’t running the drilling when the mud started erupting, but it was in charge of its own QGC bid that has just blown up in its face even before the ACCC rules on anti-competitive aspects of it.

The $292 million AGL deal includes a supply contract that increases AGL’s security and might leave Santos suddenly a little more interested in whatever happened to Oil Search’s PNG gas project that it has helped stall.

A neat feature of QGC’s defensive play is that AGL’s buy-in will be followed by a 12.5% share buyback that should mollify the hedge funds that otherwise could be a destabilising influence on the register. The hedgies get out at a profit and everyone except Santos is happy.

Santos CEO John Ellice-Flint must be wondering when his luck might change, but CEOs are supposed to make their own luck on occasion. The way the QGC bid has been attempted, that certainly didn’t happen.

And the funny thing about Santos and AGL chasing the QGC action is it’s only a few years ago that it was hard to get anyone to take coal seam gas seriously. Either player could have picked up pretty much the entire Australian CSG industry for less than what QGC is now worth.

Peter Fray

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