Rear Window
Woodside and Santos exploring merger
Myriam RobinRear Window editorRumours have circulated for days that oil and gas giants Santos and Woodside might consider merging.
The genesis of these murmurs is generally ascribed to frustrated investors. But there’s more to them than you might think.
The Meg O’Neill-led Woodside is considering a merger with Santos. Tony McDonough
In recent days, both organisations have been considering the implications and logistics of any such deal. We are not saying their discussions are definitive or have reached a conclusion. But the talks, already involving bankers and internal staff, are happening. Though both companies, for what it’s worth, declined to comment on what they termed “market speculation”.
It is no secret that Santos is in play. Its share price has long been the cause of disappointment to both shareholders and management. Some stakeholders – specifically L1 Capital with support from Wilson Asset Management and Tribeca Investment Partners – have proposed splitting the company’s liquefied natural gas assets from its conventional gas business.
At a recent investor day, Santos CEO Kevin Gallagher signalled his openness to “structural solutions”, but indicated his reluctance to break up the business due to the costs associated with “de-scaling” operations.
Woodside buying Santos whole would be one such “structural” solution that preserves the business intact. Not that it would be easy to pull off: many believe Woodside wouldn’t be interested in all of Santos’ assets, and the Australian Competition and Consumer Commission would surely cast a jaundiced eye over the whole thing.
The two companies have a colourful recent history. Both Gallagher and Santos chairman Keith Spence used to work at Woodside, while in 2021, much was made of Gallagher being in the frame to replace Peter Coleman as Woodside CEO (the role ultimately went to current Woodside CEO Meg O’Neill).
Gallagher’s preliminary meetings with Woodside resulted in Santos dangling a $6 million growth incentive payment to keep him attached to it until 2025. This payment, which vests consecutively every year, is partly contingent on progress towards the delivery of several major projects.
The last annual report revealed how the precise projects the payment is tied to have changed, with the delivery of Santos’ paused Dorado project becoming optional in favour of delivery of the Pikka project, which Santos acquired in the Oil Search merger.
Now, several of Santos’ plans face major legal and environmental hurdles. Among those already canvassed, the federal Greens last week succeeded in having Gallagher’s rather testy letters to Climate Change and Energy Minister Chris Bowen tabled in parliament, revealing a chief at pains to stress the precariousness of the Barossa project in light of the government’s now-legislated safeguard mechanism.
We would never suggest stalled progress on a $6 million incentive payment a key consideration in a tie-up involving tens of billions of dollars. But if a change of control transaction were to occur, it would be up to the board to decide whether to vest what remains of the incentive payment immediately.
If Gallagher can’t bring himself to Woodside, perhaps Woodside can be brought to Gallagher.
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