Santos Not Expected to Write Down Coal-Seam Gas Assets

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Researched by Industrial Info Resources (Perth, Australia)--Despite growing expectations that its stalled progress could prompt a revision of its value, oil and gas producer Santos Limited (ASX:STO) (Adelaide, South Australia) says that it expects to avoid a write-down of its coal-seam gas assets in New South Wales (NSW).

Santos acquired NSW coal-seam gas explorer Eastern Star Gas for $738 million (AU$722 million) in November 2011. Since that time, its $511 million (AU$500 million), three-year exploration and appraisal drilling program has been held up by a number of legislative changes from the NSW government.

A Santos spokesperson said that while the company was concerned about the potential impact of the legislation proposed in NSW, a write-down was not on the agenda. "It is not something we're contemplating at this point in time," the spokesman said.

The coal-seam gas assets Santos owns in NSW are located in areas that are less densely populated and subject to less intense agricultural use than those held by some of their competitors, such as AGL Energy Limited (ASX:AGK) (Sydney, NSW) and Dart Energy (Brisbane, Queensland). That could mean that Santos will be comparatively insulated from the impact of the proposed changes.

"We think our operations won't be affected, but we need to go through the process and work out just what this all means," the spokesman said.

Market analysts currently attribute no value to the Santos NSW assets, instead basing Santos's value on their interests in the Gladstone and Papua New Guinea LNG projects, and the Moomba facility in the Cooper Basin, which is the symbolic home of Santos.

Royal Bank of Canada analyst Andrew Williams said that he did not ascribe much value to the assets, "simply because of those local issues."

"Does it have the potential to be written down? Yes. But the order of magnitude, I couldn't even begin to speculate," Williams said.

Deutsche Bank analyst John Hirjee said the question of whether Santos needed to revisit the value of its NSW coal-seam gas assets was "a valid one." But he noted that, due to its ownership of the Gladstone LNG project, Santos could potentially argue to its auditors--who will ultimately determine whether a write-down is necessary--that the NSW gas was earmarked for eventual processing through Gladstone and export into higher-priced Asian gas markets.

Any write-down of the NSW assets would come at a sensitive time for Santos and its balance sheet, which is being stretched to allow for the funding of both the $18.5 billion (AU$18 billion) Gladstone LNG project and the $19 billion (AU$18.5 billion) PNG project. Santos owns a 30% stake in Gladstone and a 13.5% share of PNG LNG.

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