Santos, Oil Search in $21b merger deal
Oil Search and Santos are set for a $21 billion-plus merger after Adelaide-based Santos sweetened its offer to combine the two to create “a regional champion” that will be one of the world’s top 20 oil and gas producers.
The breakthrough comes two weeks after Santos’ original offer was unveiled, which Oil Search had refused to engage on as it said it undervalued its assets in Papua New Guinea and Alaska.
It follows a Zoom presentation by Santos chairman Keith Spence and chief executive Kevin Gallagher to the Oil Search board on Friday afternoon to outline the long-term benefits of the combination, which sparked a weekend of furious negotiations on the terms between the pair’s respective advisers.
Investors who had been pushing for Oil Search to engage on a potential deal immediately cheered the major step towards a merger to create a company that would overtake Woodside Petroleum in production and market value and have a portfolio of assets covering Australia, Papua New Guinea and Alaska.
Matt Haupt, a portfolio manager at Wilson Asset Management, which owns both Santos and Oil Search stock, described the development as a “great outcome”.
“These companies are definitely worth more combined than standalone,” Mr Haupt said.
“It gives them so much freedom now on their portfolio, they’ve got flexibility…and they haven’t overpaid – there will be good upside for both shareholders in the new entity.”
Both stocks made gains in early trading on Monday, with Oil Search up 5.6 per cent by mid-morning at $4.025, while Santos edged up almost 1 per cent to $6.51.
The increase of about 6.5 per cent in the offer terms comes as Oil Search is without a permanent CEO, after the sudden departure two weeks ago of Keiran Wulff due to ill health, and after complaints about his behaviour from a whistleblower, leaving the PNG-based company in a position of weakness.
It involves 0.6275 new Santos shares for each Oil Search share, representing the equivalent of $4.52 per Oil Search share based on the price of June 24.
MST Marquee analyst Mark Samter told clients he was “delighted to see common sense prevailing” with the agreement to work towards a merger.
“The fact [Santos] are willing to make this bid, which is being done from a position of strength, not weakness, gives me comfort their scrip is not overpaying for its share of the combined entity,” he said.
“For the Oil Search shareholders who think the business is being given away too cheap, I still think they need to remember both the ability for Oil Search to extract value in its assets stand alone and the 38.5 per cent share that they are getting in the huge value accretion this deal will create.”
Mr Gallagher said the proposed merger “represents a compelling combination of two industry leaders to create an unrivalled regional champion of size and scale with a unique diversified portfolio of long-life, low-cost oil and gas assets.”
The offer increases the premium presented to Oil Search shareholders to 19.7 per cent. Oil Search shareholders would own around 38.5 of the merged company, up from 36.9 per cent in the original proposal.
“The Oil Search board believes that the revised proposal presents Oil Search shareholders with an opportunity to maintain ongoing exposure to Oil Search’s portfolio of world-class assets as part of a merged group for which there is strategic logic,” Oil Search said in a statement.
It added that Oil Search’s board intended to unanimously recommend shareholders vote in favour of the offer in the absence of a higher bid and subject to each party completing due diligence on the other to its satisfaction. The recommendation is also subject to the findings of an independent expert report.
Mr Gallagher, who would run the merged company, said it would have strong cash generation from a diverse range of assets, providing a strong platform for sustainable growth and continued shareholder returns.
It would have more than $US5.5 billion ($7.5 billion) of liquidity to self-fund development projects, something investors say will be critical given the escalation of climate concerns among equity and debt investors.
Mr Gallagher said the proposal “represents an extremely attractive opportunity to deliver compelling value accretion to both Santos and Oil Search shareholders”.
The proposed merger comes amid expectations of a wave of change and consolidation sweeping across Australia’s oil and gas sector, caused by increasing environmental, social and governance concerns and heightened uncertainty about future demand and prices for fossil fuels as pressure builds for decarbonisation.
Speculation has also arisen that Woodside is in the hunt for BHP’s petroleum assets, while at the smaller end of the market, consolidation is widely expected between Perth Basin players Strike Energy and Warrego Energy.
A merged Santos-Oil Search would have oil and gas production assets across Papua New Guinea, eastern and Western Australia as well as the Northern Territory, as well as Oil Search’s yet-to-be-developed oil venture in Alaska.
Santos said its “multiple independent sources of low-cost cash flows” would make it “resilient throughout the oil price cycle”.
It highlighted in a slide presentation the potential upside that could be unlocked from the infrastructure assets in the business, which it said “is expected to be attractive to infrastructure investors,”
In PNG, a merger would bring together interests across the Exxon-led PNG LNG project and the Total-led Papua LNG venture. The combined company would become the largest shareholder in PNG LNG, overtaking Exxon, potentially opening up the possibility of a sell-down from the merged 42.5 per cent holding.
Exxon and Total have both been suggested as potential counter-bidders for Oil Search but the due diligence that will now take place over the next four weeks will be carried out on an exclusive basis, potentially deterring counter-bidders.
Even so, Bernstein Research analyst Neil Beveridge suggested other rival suitors for Oil Search could emerge as the duo work towards a deal, which would be structured as a scheme of arrangement, which Oil Search shareholders will vote on.
“A rival bid could still emerge from other majors in PNG given the asset quality and synergies,” Mr Beveridge said, calculating that the proposed valuation in the merger terms “still undervalues Oil Search”.