Santos puts its foot on the gas with $730m offer for Eastern Star

SANTOS has made a $730 million move on Eastern Star Gas to emerge as the biggest owner of gasfields in NSW

santos puts foot

SANTOS has made a $730 million move on Eastern Star Gas to emerge as the biggest owner of gasfields in NSW, banking on increasing demand for the fuel in a carbon-constrained world.

Santos chief executive David Knox said long-term demand for natural gas from both domestic and global markets was clearly increasing.

"Especially as the carbon price becomes a reality, the industry needs to lower its emissions intensity," Mr Knox said, referring to the Gillard government's controversial carbon tax proposal.

"For Santos, the acquisition marks the next key step in our eastern Australian gas strategy."

The scrip deal, which values Eastern Star's stock at 90c a share, boosted the target's share price by 41.18 per cent to 84c yesterday. Shares in Santos were 3.7 per cent lower at $12.74.

Mr Knox said all industries would be looking for less emissions-intensive ways to generate power, and gas would clearly play an important role.

"We believe that the eastern Australian gas market is going to be stronger and that the gas is going to become an increasingly important commodity in eastern Australia, both for the reasons of the carbon (tax) and because of the success of (similar) projects in Queensland in providing export (opportunities)," he said.

"We do believe gas will be an increasingly important fuel, which is the fundamental strategy behind (this deal) that is giving us optionality." The market had been expecting Santos to make a move on Eastern Star since the suitor acquired a 19.9 per cent interest in the company in 2009 for $176m and paid $300m for a 35 per cent stake in Eastern Star-controlled exploration permits. Santos's interest in the stock had since increased to 20.9 per cent.

"The acquisition of Eastern Star is a unique opportunity to consolidate our Gunnedah Basin interests and establish the leading position in Australia's next major natural gas province," Mr Knox said.

Yesterday's move values Eastern Star at $924m, but Santos also agreed to sell 20 per cent of Eastern Star's permits for $284m to TRUenergy, which recently boosted its share of the Australian electricity market by acquiring retailer EnergyAustralia from the NSW government.

TRUenergy managing director Richard McIndoe said the two companies were well suited to develop the assets in a joint venture.

"With such a qualified partner developing and operating the field, TRUenergy can focus on its core strengths of power generation and retailing, with confidence that our equity gas will be available when we need it in the future," Mr McIndoe said.

Mr Knox said the deal was about developing and proving up the region, initially to supply domestic gas, but he said the company could do other things with the reserves.

One option could be to feed the company's $16 billion Gladstone liquefied natural gas project in Queensland.

Eastern Star's board has unanimously recommended the deal. Chief executive David Casey said the offer provided the Narrabri gas project with more options to realise its world-class potential.

Santos said the offer valued its proven, probable and possible reserves at 50c a gigajoule, which the company said was in the middle of the range of previous deals in the sector.

Chief financial officer Andrew Seaton said it was a good price for Santos and Eastern Star shareholders when compared to the 66c a gigajoule Royal Dutch Shell and PetroChina paid for Arrow Energy last year.

"This (deal) is a discount to previous transactions but it reflects the stage of maturity of the Gunnedah basin," Mr Seaton said.