Santos boss Kevin Gallagher shuffles management team as Woodside talks begin

A reshuffle returning one of Kevin Gallagher’s most trusted advisers to an executive role suggests the Santos boss wants no doubt over who is running merger talks with Woodside.

Santos managing director Kevin Gallagher reshuffled his most senior leadership team last week ahead of the launch of formal talks with Woodside over a potential $80bn merger, with a virtual dataroom opened over the weekend as part of early talks.

The reshuffle was announced internally a week ago as the company’s vice-president in charge of ESG, Janette Hewson, stepped down from her role ahead of taking up the job of running the Queensland Resources Council. Her role was given to Santos general counsel Michael Abbott, who picked up responsibility for environmental and governance issues.

Sources said a virtual dataroom was populated with initial information over the weekend as the pair move to the next stage of a potential deal after opening talks last week.

With Santos vice-president for upstream gas and liquids David Banks announcing plans for early retirement in mid-2024, former Hurricane Energy and PwC executive Rebecca Jones was promoted to his role.

The reshuffle will also see long-term Gallagher aide Tracey Winters return to an executive role with the company, as the Santos boss prepares for negotiations with Woodside over the company’s valuation amid pressure to get a good deal.

Ms Winters joined Santos in 2017 as the company’s head of government and public affairs, but moved to a consulting role in February 2023 after the company’s merger with Oil Search was largely bedded down.

As Santos approaches fresh merger discussions, Ms Winters has returned to an executive role as Santos chief strategy officer and as Mr Gallagher’s chief of staff.

Mr Gallagher stepped back from his daily duties in late September to help care for a sick family member, and industry sources suggest the return of Ms Winters to an executive role sends a clear signal that the Santos boss wants no uncertainty within the company around his central role in proceedings with Woodside.

Santos Chief executive Kevin Gallagher. Picture: Mark Brake

While talk of the potential merger emerged in the market well before either side was ready for any discussion of a combination to go public, sources say enough goodwill remains for merger talks to continue.

The major issue will be what premium is offered in a scrip-based merger – and whether Santos shareholders, already on the warpath over the company’s market valuation, would be prepared to accept a so-called “skinny premium” deal.

Activist investors including Melbourne-based fund manager L1 Capital – with the support of Tribeca Investment Partners and Wilson Asset Management – have previously expressed public unhappiness with Santos’s valuation, pitching a plan to split the business and separate Santos LNG and unconventional and onshore assets.

That plan won little support in the market, but is believed to have triggered an strategic review of the company’s options.

And, while Santos’s shareholder agitation and perceptions of leadership drift have made the company more vulnerable to an approach, sources close to Woodside have been at pains to emphasise the move should not be seen as an opportunistic attempt to take advantage of short-term share price weakness.

Woodside’s internal teams are believed to have been running their eyes over Santos for much of the year, even as the company was bedding down the integration of BHP’s petroleum division with its own LNG operations.

Both companies said last week that discussions were at an early stage and, even if agreement could be reached over potential terms, no deal was likely in the near term.

Santos shares rose on news of the merger talks on Friday, jumping more than 6 per cent to a $7.25 close. Woodside shares fell 16c to $29.81.

UBS values Woodside at $33.50 a share and Santos at $9 a share, noting that they now trade on implied oil prices of $US65 and $US58 per barrel, respectively.  

UBS analyst Tom Allen said that given the significant discount at which Santos shares are trading, based on the implied oil price, there was “considerable value in Santos’s portfolio, not reflected in the price”.

The broker estimated synergies from a merger may range from $150m-$300m, derived from corporate costs, exploration capex, 20-30 basis points of savings on cost of debt and trading synergies via the larger portfolio.

Any merger could boost earnings per share from year one – a positive for Woodside shareholders after considerable consensus downgrades over the past month. Given Santos’s heavier relative capex burden over the next three years, any deal would lift free cash flow from 2027.

It’s thought that merger talks could involve a break-up of Santos, with the GLNG gas export project in Queensland potentially being acquired by Gina Rinehart’s Senex Energy, while fellow Adelaide producer Beach Energy could buy Santos’s Cooper Basin and West Australian assets.

Originally published as Santos boss Kevin Gallagher shuffles management team as Woodside talks begin