Santos Limited (STO) 2014 AGM Voting Intentions

Company/ASX Code : Santos Limited (STO)
Registry : Computershare Services
Poll/Show of Hands : Poll
Webcast : No
Venue :
10.00, Hall F Plaza Level
Adelaide Convention Centre North Terrace
Adelaide, South Australia
Monitor : Mr Stefan Landherr
AGM Details / NoM : Friday 16th May, 2014

A pre-AGM meeting occurred on 29 April 2014 with Santos board chairman, Ken Borda and company secretary, David Lim. ASA was represented by Stefan Landherr, James Hahn and Bob Ritchie. Ian Cooper, our designated monitor is overseas and sends his apology.
In addition to the AGM resolutions, we discussed political donations and the conduct of the meeting.
On political contributions we note that Santos has made direct contributions to major political parties, fairly evenhandedly. Our policy position is against donation of company funds to political parties. The chairman stated his own position is normally the same as ours, except that there are occasions when it is in the company’s interest to declare its position in relation to a political policy and back that by placing some money where its mouth is.
On the conduct of meeting, we asked that proxies be displayed at the commencement of consideration of each item of business. The chairman stated that all resolutions would go to a poll. He is mindful that some shareholders might feel intimidated if shown early that proxies were strongly against their position.

ASA Position
Not Applicable
Item 1: Approval of accounts

Taking return on equity (ROE) as an indicator of financial performance, in the last decade the first half produced average ROE of 28.2% and the second 6.9%. This latter period has been characterised by capital development; particularly the PNG LNG project for which Santos has ‘farmed in’ (i.e bought a share of the venture) and Gladstone LNG which Santos operates and has farmed out 70% as a means of financing this venture. Revenue at current prices is expected to double across the next three years. We have no estimate on what effect that will have on ROE but it should double at least and perhaps do somewhat better than that.

Seeking to compare ROE with weighted average cost of capital, we found the chairman, a former investment banker, was very mindful of that, knowing the answer in both $AUS and $USD, although the information he provided was not precise, protecting commercial confidentiality. Although the company has performance measurement focused on earnings per share, we're confident it's also mindful of performance measured against cost of capital.

A small net decrease in reserves during 2013 occurred. We discussed in general terms the foreshadowed position for the next half decade. As LNG production increases dramatically there will be a need for both development and further exploration. In that regard, Santos is primarily focused on development onshore in Australia, although it will continue its interests already established outside Australia in PNG, Indonesia and Vietnam.

We discussed strategic risk assessment of foreign projects and found the company gives significant consideration to both its own history in its foreign ventures and the relationship between Australia and those countries. Discussing risk assessment of foreign denominated debt, we found the relative size of AUD and USD denominated debt is broadly in line with foreshadowed revenue streams in each currency.

ASA Position
Item 2(a): Re-election of Peter Coates as a Director

While the continuation of a former chairman as a director is unusual, we note the circumstance which caused Mr Coates to resign from the chair and his desire to follow through on major projects for which he was present on initiation. We have a recently adopted a policy position against the continuation of a former chair as a director, our rationale including the inhibition a board may have for timely writedown of legacy assets which are not performing.

Our inquiry however found the present chair asked the former chair to remain on the board, not only for the reasons we normally would note but also because of his network of contacts. His workload, while diminished from when he stepped in as a Glencore executive, nevertheless is still high. On balance we support his reelection, noting the importance of his ability to ‘open doors’ which may not be readily available to other directors or executives of the company.

ASA Position
Item 2(b): Election of Scott Sheffield as a Director

We note that Mr Sheffield brings industry experience of a type and extent not previously on the board yet is highly relevant. We support his election, noting Pioneer Natural Resources has no design work in Australia and Santos similarly has no intention for the USA. Australian boards should be encouraged to follow the lead of Santos in securing global industry leaders and experts to serve as non-executive directors. ASA normally opposed external CEOs have additional external board responsibilities. However, no ASA member is directly invested in US-based Pioneer Natural Resources and Santos shareholders will benefit from Mr Sheffield's global gas expertise.

ASA Position
Item 3: Adoption of Remuneration Report

There are good features which we note regarding the remuneration report:

  • It is in the main clear. The vesting year chart on page 7 of the notice of meeting is an exemplar of good practice in clear communication.

  • Short term incentive (STI) is now incorporating 30% as shares held in escrow for two years.

  • Long term incentive (LTI) assessment period is shifting from three years to four.

  • LTI initial hurdle is at 51st percentile which, while only a small step above the 50th percentile, requires performance in the top half of a population (rather than top of the bottom half).

  • Clawback provision for LTI is said to be extended (although an Annual Report p. 53 reference to p. 67 yields no result).

  • Ratio of STI:LTI for CEO compared with KMP places relatively greater emphasis on the long term for the CEO; an arrangement we consider appropriate.

  • LTI has not been paid in recent years, consistent with results for shareholders.

  • Our policy position against STI for a CEO is not new and differs from widespread practice. We do, however, acknowledge that the STI:STI ratio for CEO compared with KMP is in a desired direction.

The quantum of shares offered as incentive to KMP under LTI is an issue that we were unable to resolve in the time available, which was extended beyond the hour by twenty minutes. Consideration of item 4 on the AGM agenda pertains. While conversation on this matter was only preliminary, there was significant advance in our understanding of the company’s position and their understanding of ours and we agreed to undertake further dialogue.

While noting the very significant improvements in remuneration arrangements which have occurred, we don't vote for adoption of a remuneration report simply because there have been improvements. The overall position now obtained, however, and commitment to further dialogue on an important matter leads to our decision to support adoption of the remuneration report.

ASA Position
Item 4: Grant of share acquisition rights to CEO Mr David Knox

While the number of shares proposed for grant to the MD is stated on page seven of the notice of meeting, dollar value at market price (at time of decision to grant) is not stated in either the remuneration report or the notice of meeting. While our position on this matter is only recently declared, it is consistent with a recommendation to the Corporations and markets Advisory Committee by the Australian Institute of Company Directors. We have asked that these figures be told to shareholders at the AGM and the chairman agreed to give consideration to our request.

For the MD, LTI is described in the annual report as one-third of the total remuneration package (page 55). The 283,264 rights to shares proposed for the MD is more than 50% higher than his fixed annual remuneration when the share price is measured at close of market on 31st December 2013.

We understand how the application of a "fair value" algorithm can reduce this figure to a present value equal to the MD’s fixed annual remuneration, representing an estimate of the most likely cost to the company taking into account a probability distribution of the likelihood of a bonus occurring and discounting future flow of money to the present time.

We regard this figure as appropriate to the company for accounting purposes but not to valuation as an incentive from an executive’s perspective (or a shareholder’s). In regard to this latter point, we hold a view different from the company. This is a matter about which we've agreed to further dialogue.

Our present standard for making a judgement on this proposal hinges on clear declaration to shareholders of the number of shares granted and the dollar value measured at share price at the date of the board deciding to support the grant; say 31 December 2013. In anticipation of this standard being met, we declare our intention to vote in favour of adoption of the grant to Mr Knox.

ASA Position
Item 5: Narrabri Gas Project

We are now informed of the company’s perspective on the Narrabri project. In essence:

  • the area under licence is mostly NSW state forest,

  • the company has an overarching agreement with the farmers federation,

  • the company has individual agreements with land owners (which may be a term to cover a 99-year lease) before working on any land,

  • wells will be double cased in steel and concrete (i.e two layers of steel and two layers of concrete), the target formations are a long way below the water table accessed by land owners, and

  • the company states its environmental management is at least equal to if not superior to that of any alternate developer of this project.

We expect the Wilderness Society will be invited to speak in support of the proposal and our interest will focus on whether the speaker can identify at least one alternate company which could better protect the environment and offer a price for the assets which is economic for Santos to accept.

While our interim position is to vote against the proposal, that is contingent on whether speakers for the proposal can meet the standard we have set.

Note: this resolution was proposed by a group of 161 Santos shareholders (0.0475% of the company's shares on issue) with the support of the Wilderness Society.

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