Has Beach bitten off more than it can chew?

WHAT difference does $100 million make? It’s a question Slugcatcher believes might be occupying the thinking time of the chaps who run a couple of well-known Australian petroleum producers, Santos and Beach.

Santos, because senior management knows that for an extra $100 million their company might have won control of Delhi Petroleum, and cemented its position in the Cooper Basin of central Australia.

Beach, because senior management knows that it might have paid $100 million too much for Delhi – potentially exposing itself to a future takeover.

And, who you might ask The Slug, would want to acquire Beach at some future stage?

Why, Santos, of course.

Before going any further a little explanation. Sometime earlier this year, Delhi, a long-term player in the Cooper, came up for sale. Santos, the dominant Cooper company, held its hand up and said it was a buyer.

Eventually, a price of $474 million as agreed and Santos was feeling pleased with itself.

Until Beach entered the game by first contacting Delhi’s biggest shareholder, the investment funds arm of Westpac Bank, with a more enticing offer. How much more enticing? Why, $100 million more – a rather delicious 21% more than the Santos price.

Westpac, which spoke for 45% of Delhi, thought about the Beach price of $574 million – for about two seconds – and decided that an extra $100 million (the bank’s share being $45 million) was not to be sneezed at.

Even The Slug understands the attraction of a spare $100 million – but The Slug also understands that sometime the top bid in an auction can also be classified as an over-bid.

Consider the timing in all this. Santos was fiddling around with the Delhi deal in June and July – a time when the oil price was around $US65-70 a barrel. It was at those prices that it calculated that $474 million was a fair and reasonable price for Delhi.

Enter Beach, some time in late July, when the oil price was still in the $70/bbl range, and occasionally going above the $75 mark on the Nymex futures market. It was time when the sky really seemed the limit.

By early September, the deal was done. Beach had committed to the $574 million price, and set about paying down debt by raising fresh capital, starting with a $112 million share placement, and with more to come.

On the sidelines, the cheer squad said, well done Beach, that’s one on the nose for Santos, a business everyone loves to hate, largely because it has always behaved a bit like a semi-government agency – which it effectively is given the South Australian Government’s control over its share register.

But consider where we are today, as the cheering for Beach grows fainter, and the oil price retreats to around $63/bbl.

On the stock market, Beach’s share price has also retreated, from a Delhi-deal euphoria of $1.67 on September 6 to recent trades around $1.31.

Extra shares on issue will have had a dampening effect on the price, but so has the falling oil price, and there are some market observers who are asking whether Beach paid too much for Delhi.

The Slug withholds judgement on the price paid. Perhaps it will turn out to be the company-maker for Beach, which has dramatically lifted its oil reserve position, and gained access to a swag of Cooper basin tenements.

But if the oil price (and Beach’s share price) continue to move south, it’s a fair bet that Santos, the under-bidder in the race for Delhi, will be calculating what’s a fair price for all of Beach – its partner in several exploration plays, including the recently spudded Glenaire gas well in the Otway Basin – and a pain in the backside that could be easily removed.

Note: The views of Slugcatcher are not those of APPEA.

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