Santos could draw global interest amid Woodside talks

Overseas interest in Santos could mirror the takeover tussle that surrounded PNG explorer InterOil Corporation in 2016, which was eventually acquired by Exxon after a $US2.2 billion bidding war with Oil Search, which was bankrolled by Total. Oil Search, which owned similar interests, later merged with Santos in December 2021.

Mr Gallagher also emphasised his long-term commitment to Santos in words that defy suggestions that a move towards combining with Woodside reflects he may be heading towards the exit door.

“I’m here, I am energised, and I am committed to Santos,” he said on the video, which was sent to staff on Wednesday. “And I’m looking forward to a very exciting 2024.”

Conoco, EIG

Some investors are also pointing to possible interest in the $23.4 billion company from ConocoPhillips, a major player in Alaska, where Santos is developing the $US2.6 billion Pikka oil project, and which also has LNG interests. E&P Capital says Total, ConocoPhillips and BP all stand out as logical potential acquirers.

US-based private equity firm EIG, which has just lost its bid with Canada’s Brookfield to buy Origin Energy, could also revive its interest in Santos, they say. EIG’s Harbour Energy unsuccessfully bid $14.4 billion for Santos in 2018.

Woodside and Santos over the weekend set up data rooms to conduct due diligence after confirming last Thursday they were in early talks on a merger. The potential transaction is thought to involve a scrip-based merger with a small premium, although Santos investors are calling for a fuller premium.

Daniel Moore, a portfolio manager at Investors Mutual, an investor in Santos, said a small premium would not be satisfactory.

“We think Santos’ growth projects aren’t valued appropriately and that’s why Woodside is interested,” he said. “Given the synergies aren’t massive, a skinny premium doesn’t make a heap of sense to us as a Santos investor.”

Global consolidation

Mr Moore said he would not be surprised if Santos now attracted interest from an international oil and gas producer.

“Because Santos hasn’t rebuffed the approach, I think it’s fair to say Santos is potentially now in play,” he said. “So it wouldn’t surprise me if a deal was done with Woodside or another global energy player.”

Santos, which has been under pressure from investors over its underperforming share price, has been considering options to increase shareholder value over the past few months, but with a focus on a potential demerger. Its LNG portfolio. which includes stakes in producing and planned projects in Papua New Guinea, the GLNG venture in Queensland and Darwin LNG, could be worth more than its total market value, on some estimates.

But others doubt an international bidder will emerge, saying Santos’ work over the last few months to explore restructuring or asset sell-downs has struggled to get interest in a deal that would deliver much of a premium over its share price.

Santos shares have gained ground since the talks were revealed, but closed down 1¢ at $7.30. Woodside shares dipped 1.1 per cent to $30.02.

They say part of the problem is Santos’ non-LNG assets, including its Cooper Basin gas interests. Even in LNG, some of its assets may be problematic, including the high-carbon Barossa project in the Timor Sea, which is battling to secure environmental approvals, while coal seam gas-based GLNG has never produced at full capacity.

“If there was ever a time for potential acquirers to look at Santos it may be now, but the only other plausible acquirers for Santos (if any) we can think of may be Conoco, TotalEnergies or EIG, and they all seem focused elsewhere,” said one analyst.

The merger talks reflect a broader wave of consolidation in the global oil and gas sector, particularly in the US, where this week Occidental Petroleum agreed to buy CrownRock, a producer in the US’s biggest oil-producing region, the Permian Basin, for $US12 billion. That followed ExxonMobil’s $US60 billion takeover deal with Pioneer Natural Resources and Chevron’s $US53 billion acquisition of Hess Corporation.

Meanwhile, the Australian Workers’ Union and the Offshore Alliance, comprising the AWU and the Maritime Union of Australia, said they would welcome a merger between Woodside and Santos, suggesting it could lead to higher pay for some workers.

“The Alliance would expect that the resultant larger company will be able to more effectively meet and exceed its environmental, industrial and safety obligations,” said Paul Farrow, AWU national secretary and Offshore Alliance spokesman.

“The Alliance does not anticipate any operational job losses should the merger proceed, and expects Woodside to conduct a gap analysis to ensure that post merger, all workers are remunerated at tier-one rates of pay.”