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Published on : May 22, 2018

The recent sharp rise in oil prices world over has upped the appetite for some ambitious producers who aim to secure some lucrative oil-linked contracts. This has made developed countries a breeding ground for takeovers. Notwithstanding the usual caveats, the advantage of low cost of production and transportation has led some investors to sweeten the bids. Harbour Energy, a U.S.-based energy investment vehicle, announced on May 21, 2018 that it has sweetened its bid and making full and final offer of US$14.45 billion for taking over a prominent Australian resources company. This is the fifth in the spate of bid offers the company has made so far and is the third since the last week with the first offer being made in early April this year.

Deal Conditional on Hedging of 30% of Santos’s Oil-Linked Production to 2019

Experts opine that the current offer was sweetened against the backdrop of rising oil prices and after intense negotiations between the companies over the past weekend. Harbour Energy has hinted to sweeten the bid conditionally after Adelaide-based Santos agreed to implement hedging of oil-linked production in 2018 and to 2019. The hedging is likely to cover around 30 per cent of oil-linked production of the Australian producer having a prominent presence in Asia Pacific region. According to Santos, it still can reap the benefits of oil price rise by keeping a hold of around 70% of the oil production.

Hedging come with Caveats; However, Harbor Determined

However, making such changes to the existing hedging policy has several caveats, with the most marked effect being on cash flows and additional risk.  Nevertheless, with oil prices hovering around $US80 a barrel recently, the U.S. company wanted to ensure to avert any rival bids by making the current proposal.

Harbour Energy, the energy investment vehicle managed by EIG Global Energy Partners, has agreed to offer $US5.21 a share, valuing the company at around US$1 billion above its previous offers. As stated by the company, additional hedging may not be required for supporting its financing; instead, it would aim for reducing transaction costs.

For the deal to go through, it will need the go-ahead by the Australian Foreign Investment Review Board.