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Will Santos Ltd buy Senex Energy Ltd in 2018?

Some days I think that oil and gas producer Santos Ltd (ASX: STO) is the lead character in a terrible, low budget T.V. show.

After having its LNG dreams threatened by crashing oil prices and an aggressive debt load, the company clawed its way back, swooning investors out of billions of dollars to pay down debt and claim redemption as a ‘new’ company.

But here is the interesting plot twist.

Last month Santos revealed it had received a conditional take-over offer from Harbour Energy, an investment arm connected to international energy investment company EIG Partners.

EIG Partners has US$24.3 billion of invested capital around the world and earlier this year became a substantial shareholder in mid-tier on-shore energy producer Senex Energy Ltd (ASX: SXY).

I am a keen observer of Senex Energy because, despite not making a profit in the last three years, I think it is a well run company with good prospects.

EIG took a 12.2% Stake in Senex Energy to form a strategic alliance which provides the company a channel for funding the development of its Western Surat Gas Project. The project has a 20-year gas sales agreement with the Santos operated GLNG joint venture.

But to me it seems like there is a lot of potential for Santos to simply acquire Senex which would likely have EIG’s blessings.

With a strengthened balance sheet and further debt reductions in 2018 as cash flows improve Santos will be better placed to consider the addition of Senex Energy which had no debt and $110 million in cash at 30 September 2017.

There is another overlap too. Both companies have production interests in in the Cooper Basin region which means, strategically, Senex closely matches two of the five core pillars in the Santos portfolio.

More importantly, Senex has growing reserves which will be a be huge asset to Santos in coming years.

Foolish takeaway

While there is clear strategic overlap between Santos and Senex Energy, the challenge I see for a 2018 acquisition is Santos’ strategic timeline. The big producer is still in its “transformation” phase and we might have to wait a little longer to for Santos to move into its “build” phase to see if sparks fly between the two.

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Motley Fool contributor Regan Pearson has no position in any of the stocks mentioned.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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