By Nick Toscano
Two of Australia’s biggest oil and gas companies are set to create a $21 billion industry juggernaut after Santos raised its offer to merge with rival Oil Search.
The companies confirmed on Monday morning that Santos had presented a revised offer for the merger under which Oil Search investors would receive 0.6275 new Santos shares for each Oil Search share held, implying $4.29 per Oil Search share based on July 19 prices.
Santos, one of Australia’s largest oil and gas producers, has sweetened its offer to merge with Oil Search.Credit: Kelly Barnes
The offer, which Oil Search’s board intends to unanimously recommend for approval, comes after Oil Search initially rebuffed an offer from Santos in July, saying it undervalued the company and its assets in Papua New Guinea.
If the tie-up goes ahead, Oil Search shareholders would own approximately 38.5 per cent of the merged group and Santos shareholders will own 61.5 per cent.
The new offer lifts the premium from 12 per cent to 17 per cent, Santos said.
Oil Search shares rose 4.7 per cent to $3.99 on the news, while Santos closed the session 0.6 per cent higher at $6.49.
“The logic of combining the two assets makes a lot of sense,” said Blake Henricks of Firetrail Investments, which has shares in both companies. “All eyes are now on what Santos can do, and what kind of plans there are for the combined entity.”
The merger deal followed a weekend of negotiations that started with Santos managing director Kevin Gallagher and chairman Keith Spence hosting a video call with Oil Search’s board after the market’s close on Friday to promote the long-term benefits of the tie-up. Mr Gallagher said the proposal represented an “extremely attractive” opportunity.
“It 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,” Mr Gallagher said.
The combined entity would become an ASX top-20 company, overtaking Woodside Petroleum as the nation’s largest oil and gas producer and ranking among the 20 biggest producers globally.
Oil Search’s board said it would open its books to Santos and recommend investors support the proposal in the absence of a higher offer being received.
Any merger agreement would be subject to conditions including Oil Search shareholder approval, PNG court approval and regulatory approvals, the companies said.
MST Marquee analyst Mark Samter said he was “delighted” with the news.
“I am in a slight state of shock that common sense has actually prevailed in the oil and gas industry,” he said.
“The fact they [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.”
Credit Suisse analyst Saul Kavonic, however, said it appeared that Santos may have overpaid.
“We struggle to see how Santos can capture synergies to justify the approximately 17 per cent premium to Oil Search shareholders, let alone much more to provide upside room left to Santos shareholders,” he said. “Over $US160 million per annum in cost savings would be required to justify the premium.”
Investors and analysts are predicting a wave of merger-and-acquisition activity to sweep the oil and gas industry in coming years, as elevated concerns about global warming cause lenders to flee the sector and push the cost of capital higher.
A landmark report by the International Energy Agency in May recommended investors must avoid funding any new oil and gas fields for the world to achieve the Paris agreement’s goal of limiting global temperature rises to 1.5 degrees.
The Australasian Centre for Corporate Responsibility – a shareholder advocacy group that has been pressuring fossil fuel producers to set bolder decarbonisation targets – said the tie-up suggested “neither company is serious about taking climate action”.
“Their only goal is to maximise oil and gas production at a time when climate chaos is raging across the northern hemisphere,” said Dan Gocher, the group’s climate director.
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