Santos to Buy Delhi to Raise Stake in Cooper Basin
17/07/2006
By Angela Macdonald-Smith

July 17 (Bloomberg) -- Santos Ltd., Australia's biggest natural gas producer, agreed to buy Delhi Petroleum Pty for A$474 million ($357 million), raising its stake in the country's largest onshore petroleum province.

The agreement involves buying all the equity in Delhi and its units from Westpac Funds Management Ltd. and offering A$83.25 for each of the Floating Interest Energy Linked Securities, or FIELDS, issued by Westpac's Australian Onshore Energy Fund, Adelaide-based Santos said today in a statement.

The Santos offer is 25 percent higher than the last closing price of the securities.

Westpac said in December that Delhi was reviewing its assets and debt because of a possible shortage of funds for its share of investments. The Cooper Basin ventures boosted spending on drilling this year as they seek more oil reserves
and Delhi couldn't afford to participate in all the wells.

``The deal looks reasonable for Santos, it gives them nearly complete control over the Cooper Basin operation,'' said Brendan Fitzpatrick, an oil and gas analyst at Aegis Equities Research Pty in Sydney. ``Previously, in the large oil well drilling campaign in the Cooper, Delhi could elect which wells it would participate in. This removes uncertainty about how much of the discoveries will be attributable to Santos.''

 Shares of Santos, which is being advised by Citigroup Inc., rose 9 cents, or 0.8 percent, to A$11.86 on the exchange, outpacing a 0.6 percent gain in the exchange's benchmark energy index. The price of the FIELDS rose A$16.70, or 25 percent, to A$83.20, almost on a par with Santos's offer.

Investors Object
Under the terms of the deal the FIELDS are valued in total at about A$250 million, compared with a face value of A$300 million. Santos also assumes Delhi's outstanding debt of about A$218 million and pays A$6 million to Westpac for Delhi's equity.

Some investors objected to the A$6 million payment and said all the equity in the purchase should go to the FIELDS investors. The proposal is subject to approval of FIELDS holders.

``Based on what we've seen so far I would be inclined to vote against it and I would be encouraging other note-holders to vote against this proposal,'' said Fred Woollard, who manages about A$6.5 million at Samuel Terry Asset Management in Sydney. The FIELDS are the largest holding in the fund. ``The
shareholders normally rank behind the creditors, I don't see why this should be any different.''
    
The deal values Delhi at a ratio between enterprise value and earnings before interest, tax, depreciation and amortization of four times, which is ``far too low,'' he said. Woollard said he will seek to join with other FIELDS investors to devise an alternative proposal where the FIELDS would be converted into ownership of Delhi.

Rating Unaffected
Santos's BBB+ rating isn't affected by the proposed acquisition, Standard & Poor's Ratings Service said in a statement.

``The proposed acquisition is strategically sound,'' Standard & Poor's said. ``It adds about 67 million barrels of oil equivalent of proven plus probable reserves to Santos's energy portfolio and will provide the company with improved flexibility to pursue its Cooper Basin oil program at a time when market conditions are conducive to a ramp-up in oil exploration.''

Santos will fund the acquisition from debt and then may refinance the debt and Delhi's senior debt to retain its BBB+ credit rating, the company said.

Cooper Stake
Santos said July 12 it was in talks to buy Delhi, which owns 20 percent and 23 percent of two Santos-led ventures in the Cooper Basin in central Australia. The purchase increases Santos's share in the Cooper Basin fields to about 85 percent and will add to Santos's earnings and cash flow in the year starting Jan. 1, the company said.

``Delhi is a natural acquisition for Santos given our long-term operator-ship of the Cooper Basin assets and builds on our strategy to extend and enhance the value of our existing core area in eastern Australia,'' Santos Managing Director John Ellice-Flint said in the statement to the Australian Stock Exchange.

Exxon Mobil Corp. sold Delhi to Australian Petroleum Investments Pty in May 2004, funded by debt provided by Westpac. Westpac took full control of Delhi two months ago when it bought Australian Petroleum from founding shareholders David Libling and Graeme Foley.

Santos's offer ``represents an attractive premium'' for FIELDS compared with its trading price prior to the offer, David Westaway, head of specialized funds at Westpac Funds Management, said in a statement. The offer ``is superior to
other options which have been investigated to realize value, including approaches from other parties,'' he said.

--Editor: J.Lee (cmr).

To contact the reporter on this story:
Angela Macdonald-Smith in Sydney at (61) (2) 9777-1268 or
amacdonaldsm@bloomberg.net

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