Slugcatcher: Spectres in grey cardigans stalk Santos

They almost broke out the bubbly in the downtown Adelaide office of Santos last week when Australia’s No.2 oil and gas company cracked the $7 a share mark on the stock exchange.

Almost, because any celebration would have been hosed down by a dash of reality, which shows that Santos is an improving business – but at a pace which is positively Shakespearean in the sense of that famous schoolboy “creeping like snail unwillingly to school”.

Santos says it has been very busy rearranging its management structure, boosting its exploration effort, trying to find more oil, trying to pump more gas, and trying to shake off the shackles of the South Australian Government’s 15% shareholder cap.

When Slugcatcher took a close look at the business a couple of years ago these plans looked most commendable, especially as the company was labouring under a reputation of being just a little stodgy, and run by people with a civil service mentality – a charge which seemed a bit unfair, even if many of the staff turned up for work on bicycles, in grey cardigans, with plastic lunch boxes under their arms.

All that, the new-look Santos said, had come to an end with the recruitment of a dynamic new chief executive in John Ellice-Flint – and Slugcatcher agrees. Ellice-Flint is an impressive chap, and there are plenty of people who quickly jump to his defence at the slightest whiff of criticism.

It was with this background that Slugcatcher re-visited Santos when the stock cracked the $7 barrier – its highest since late 1997, which was only a marginal improvement on its previous all-time high when Santos came close to $6.50, 10 years before in 1987.

Surely, thought Slugcatcher, a seven-year share price high is worth celebrating – if only with a balloon or two, and a few bottles of bubbly, even of the non-alcoholic variety.

Not so, said the stock market, that all-knowing collective of wisdom, because Santos remains, in the eyes of many investors, a far from impressive business. The problem, and this took Slugcatcher by surprise, is that some critics see the business slipping slowly back into the comfort zone of its grey cardigan days.

Oil reserves have not risen as quickly as hoped. Gas production is up, but gas remains the second prize of the oil sector. Discoveries have been elusive, big discoveries non-existent, and corporate activity in the small-beer category.

Oh be fair!, said Slugcatcher. Santos is doing its best and Ellice-Flint is new to the job.

Oh, what’s that you say, ahh, coming up for four years. It can’t be! Surely Ellice-Flint hasn’t been occupying the corner office at Santos for that length of time, surely he’s still new to the job, and still shaking out the cobwebs.

No, dear Slugcatcher, your man Ellice-Flint has been ensconced in his high-rise Adelaide tower block since December, 2000, taking over at a time when the fortunes of Santos were at a low ebb, it was treated as an arm of the South Australian government, and its share price was limping along at $6.

Oops! So that’s what this muted criticism is all about. In the three years and six months since Ellice-Flint took control of the reins at Santos the share price has “rushed” from $6 all the way up to $7, a gain (if Slugcatcher’s calculator batteries have not gone flat) of 16.66%, or about 5.5% a year.

To be fair, other oil stocks have not done much better. Woodside has rushed all the way from around $16 to around $16 – with a big dip down to just above $10 in the middle.

Santos, on the other hand, has been rock solid – and perhaps that’s the issue. Oil is supposed to be an exciting business, driven by exploration and discovery. It is not supposed to occupy a corner office in Australia’s (if not the world’s) most boring city, and it is not supposed to deliver a share price which is as close to the flatline on a hospital heart monitor as a company can get, and still be deemed to be alive.

Come on Ellice-Flint, four years (almost) is enough for anyone to shake out the cobwebs, rattle the cages, wield the new broom, and lift up the skirts of any business, even one where there have been disturbing reports of grey cardigans re-appearing in the corridors.

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