Santos under pressure as investors push LNG business split to drive share growth

The energy group is facing calls to split to give investors exposure to LNG, which is expected to be a great demand as countries wean from coal.

Investors call for Santos to spin off its LNG business to drive share growth.

Santos should split the company and create a separate liquefied natural gas entity, which would increase the value of the business by some 40 per cent, a group of shareholder have urged the South Australian oil and gas giant.

The proposal, first proposed by Melbourne-based fund manager L1 Capital, with the support of Tribeca Investment Partners and Wilson Asset Management – will increase pressure on Santos, which is already looking to kickstart notable growth projects in the NT and Alaska.

In a letter sent to the Santos board last week and seen by The Australia, L1 Capital said the company’s chief executive Kevin Gallagher has done an excellent job, but the share price has significantly underperformed rivals such as Woodside Energy and global giants such as Chevron and Shell which have seen shareholder returns of some 70 per cent.

L1 Capital said the value of Santos shares is largely undervalued as investors struggled to untangle the LNG asset value from the rest of the company, and as a result splitting the company along business lines would be beneficial to the market and shareholders.

Santos has stakes in the PNG LNG facility in Papua New Guinea, Gladstone LNG and a facility in Darwin, which it intends to service with gas from the Barossa. Santos also is a partner in a second LNG facility in PNG, though that project may not materialise.

L1 Capital said such a company of just LNG assets would be extremely lucrative, and many global investors would be desperate for exposure to a company that is expected to profit from the energy transition that will see many countries increase their demand for gas as they wean from coal.

Rafi Lamm, L1 Capital’s joint managing director and chief investment officer and James Hawkins, partner at the fund management company, said their analysis shows such a LNG business and entity with the remaining assets would be worth more than $10,50 a share, some 40 per cent higher than $7.55 a share that Santos was trading at when the letter was sent.

“We strongly believe the strategic rationale and value proposition of unlocking the inherent value in Santos’ LNG assets justifies the Company initiating a strategic review and seeking external advice to evaluate this proposal,” wrote Mr Lanm and Mr Hawkins.

The second company would include Santos’ domestic gas businesses across Australia’s east coast, the Dorado project off WA, the NSW’s proposed gas project Narrabri project and the Pikka gas project in Alaska.

A Santos spokesman confirmed it had received the proposal.

“Santos welcomes feedback from investors and regularly reviews opportunities to create shareholder value,” the spokesman said.

The shareholder activism comes as Santos is pushing hard to accelerate development of several projects, most notably the $5.3bn Barossa gas project in the Timor Sea that has been suspended since 2022 after the Federal Court found the oil giant failed to consult local Indigenous people adequately on the development.

The case was initiated by Dennis Tipakalippa, a Munupi elder, who challenged a decision by the regulator to allow Santos to drill wells 265 kilometres northwest of Darwin and about 140 kilometres north of the Tiwi Island

To meet its target of first gas by 2025, Santos must resume drilling in the project by the end of the year but is still awaiting regulatory approval for its amended environmental plan from the National Offshore Petroleum Safety and Environmental Management Authority.

Santos has earmarked the project as a driver of future growth. In its latest quarterly report in July, Santos said production rose to the equivalent of 22.8 million barrels of oil in the three months ended June 30, up 3 per cent from 22.2 million in the three months prior.

Originally published as Santos under pressure as investors push LNG business split to drive share growth