‘Devil will be in the detail’: Australia’s $80b merger talks spark questions

Investors are questioning the benefits of a possible $80 billion mega-merger between Australian oil and gas giants Woodside and Santos, citing limited savings, competition law concerns and concentration in an embattled sector.

A merger of $57 billion Perth-based Woodside and its smaller Adelaide-based $22 billion rival, Santos, would still need to decarbonise operations as the world races to limit the impact of fossil-fuel-induced global warming.

Both Woodside and Santos have confirmed merger discussions are under way.

It could also face the flight of capital to less harmful investments and backlash from activist investors, Indigenous and environmental groups.

“We see some rationale to explore a merger but on first impression it doesn’t appear compelling,” E&P Capital’s analysts Adam Martin and Branko Skocic said. “The devil will be in the detail,” they said.

Both Woodside and Santos confirmed late on Thursday merger discussions were under way, describing them as confidential and incomplete.There is no certainty the talks will lead to a transaction.

The analysts said the merger’s benefit was largely limited to combining both companies’ LNG assets and reducing some management overheads, an estimated saving of between $US200 and $US400 million ($303 million and $606 million)

“It may be difficult for both sets of shareholders to agree on fair value given Santos’ shareholders are looking for a premium and recently Woodside’s share price has come under pressure,” they said.

The different expectations of investors was reflected in share price movements on Friday, with the prospects of a merger pushing Santos shares up 6.2 per cent to $7.25, while the Woodside share price nudged down just 0.5 per cent.

Woodside shareholders voted in May last year to merge with BHP’s petroleum business, a $63 billion deal that turned the oil and gas producer into a top-10 global independent fossil fuel company. A year earlier, Santos acquired Oil Search in another $22 billion mega-merger.

Around the world, big oil and gas companies are using above-average revenue from soaring fuel prices following Russia’s invasion of Ukraine to double down on hydrocarbons.

In October, Chevron, a big producer in WA, bought fellow US company Hess for $81 billion just weeks after ExxonMobil paid $91 billion for Pioneer Natural Resources.

Harriet Kater, an adviser at the climate-focused Australasian Centre for Corporate Responsibility, said global consolidation in the oil and gas sector was an expected defensive strategy for an industry in decline.

Kater said there would likely be regulatory responses to less competition for gas supply in both the east coast and WA markets.

“Should the response to competition concerns be to carve up Santos’ assets between a range of different companies, the deal will get exponentially more complicated,” she said.

A spokesman for the Australian Competition and Consumer Commission said if a potential transaction progressed it would consider whether a review of the merger’s impact on competition was required.

Santos is already the dominant producer in Western Australia, with 27 per cent of the market. A merged entity would have a 46 per cent share, according to industry consultant EnergyQuest.

On the east coast, Woodside supplied 20 per cent of demand while Santos had a two per cent sliver of the market. EnergyQuest chief executive Rick Wilkinson said Santos’ local market was very low as it exported most of its production.

Richard Harris, a spokesman for the Domgas Alliance that includes heavy gas consumers Alcoa and Wesfarmers, said the WA economy relied on gas for mining, power generation, minerals processing and feedstock for industry.

Harris said Woodside’s takeover of BHP’s assets had already reduced competition. ”There is already a gas shortage in WA, and fewer suppliers to the domestic market will make it even harder for consumers,” he said.

E&P Capital said Santos is in a better positioned to benefit from merger talks as they may flush out competing bids. If the merger proceeds, it will be positive for Santos’ share price regardless.

“A competing offer could be more attractive than a merger with Woodside. We do wonder why Woodside is considering this merger and what it means for its existing asset base,” the analysts said.

Citi analysts James Byrne and Tom Wallington are more upbeat on a possible merger, saying neither company has the scale to maintain or create value through the energy transition on their own.

“We believe there could be many positives. The biggest sticking point is likely Woodside’s board finding the right value that would appease frustrated Santos shareholders,” they said.

Both companies face mounting opposition on the street and in courtrooms to new offshore gas fields or extending the life of existing liquefied natural gas plants by decades.

Legal actions against environmental approvals for offshore work of the grounds of insufficient consultation with Indigenous people, in particular, have thrown the industry into disarray.

Greenpeace Asia Pacific’s head of energy transition, Jess Panegyres, said instead of considering a merger, the companies should be winding down their oil and gas investments and putting money into clean energy.

“What’s worse than two terrible fossil fuel companies?” she said. “One even bigger fossil fuel company.”

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