Abu Dhabi’s ADNOC abandons $30bn Santos takeover bid
Santos is in damage control mode after Abu Dhabi sensationally ended its stalking of the South Australian oil and gas producer, just days ahead of a formal offer deadline.
Santos shareholders are deflated by the collapse of a third deal for the oil and gas company, heaping pressure on the board to consider a radically different future for Santos and possibly a break-up.
The XRG consortium — a joint venture between Abu Dhabi’s state-owned oil and gas major ADNOC and US private equity firm Carlyle — on Wednesday became the latest bidder to walk away from the South Australian target. The shares fell 12 per cent to $6.74.
The shock move happened 48 hours before a binding deal for the all-cash offer was due to be tabled.
ADNOC’s withdrawal followed months of negotiations and expands a bidders’ graveyard after abandoned talks with Woodside Energy in 2023 and Harbour Energy in 2018.
The XRG consortium struck a $8.89 a share agreement with the Santos board and completed months of due diligence before its decision to walk away, citing commercial value concerns.
Santos chairman Keith Spence argued the company’s prospects were attractive. He pointed to the imminent completion of the $5.4bn Barossa LNG project in the Northern Territory and the $2.6 billion Pikka Phase 1 oil project in Alaska, which is expected to start production next year.
“With production set to rise as Barossa and Pikka Phase 1 come online, and unit production costs expected to trend lower over time, our strategy is clear: generate cash, reward shareholders, reinvest to backfill and sustain our infrastructure, and build and grow our production, while continuing to operate safely and reliably,” Mr Spence said.
The market was unconvinced; “I didn’t really think the deal would happen due to the politics but I’m also not sure Santos can say that the future is as bright as they insist,” said one institutional investor, who spoke on the condition of anonymity.
“It is hard to imagine that two projects are going to deliver the movement in the share price that all shareholders want.”
Analysts were similarly sceptical. E&P’s Adam Martin said XRG’s exit would only increase pressure on management to find alternative ways of creating value.
“Another failed transaction creates doubt in the market,” Mr Martin said. “It’s unlikely Santos remains in its current form over time, with investors and management looking at alternative structures. The pressure for a demerger, especially of the LNG business, is only going to build.”
That pressure was on full display last year after merger talks with Woodside Energy unravelled. Some shareholders at the time argued a separation of Santos’ LNG assets from its oil portfolio would deliver a clearer valuation and attract more investor interest.
Santos’ board has resisted renewed calls for a structural split but sought to turn the tables on its suitors by suggesting the XRG consortium could not have cleared regulatory hurdles.
In a pointed statement, Santos said the bidders had refused to accept an “appropriate allocation of risk” under the scheme implementation agreement, including obligations to secure approvals and to make a “reasonable commitment” to domestic gas supply.
“The XRG consortium would not agree to an appropriate allocation of risk between the XRG consortium and Santos shareholders,” the company said. “This included the obligation … to secure regulatory approvals and the provision of a reasonable commitment to the development and supply of domestic gas.”
The comments were interpreted as a thinly veiled claim that ADNOC and Carlyle had been unwilling to make binding commitments to supply gas into the Australian market — a characterisation that was rejected by people close to the XRG consortium, who said the bidders had made clear in public and private that they were prepared to support domestic supply obligations.
For Santos investors, however, the bigger issue remains one of growth. Barossa, which is days from completion, is expected to underpin LNG exports from Darwin for decades, while the Pikka project offers exposure to US oil production.
Whether the two are enough to reverse a persistent discount on Santos’ share price is far from certain.
Santos pledged late last year to lift shareholder returns in 2026 which could constrain the company’s capacity to reinvest in future projects.
Santos also faces an uncertain impact from the government’s review of the east coast gas market. Some industry participants, most notably Origin Energy’s part-owned Australia Pacific LNG, have urged Labor to restrict the ability of Santos to purchase gas from the local market which it then sells overseas. Santos sources insist inhibiting its gas purchasing power will disrupt supply contracts to Asia.
The stalemate underscores the fraught politics that surround big-ticket foreign acquisitions of Australian energy companies, with regulators under pressure to safeguard domestic fuel security while still encouraging investment.
The prized possession in Santos’s locker is a 40 per cent stake in the Papua New Guinea gas venture known as PNG LNG along with its twin Australian export projects: GLNG in Queensland’s Gladstone, and the Darwin LNG plant in the Northern Territory.
On Wednesday, The Australian revealed one of the nation’s most powerful unions demanded Jim Chalmers block Abu Dhabi’s $30bn takeover over fears the Middle East operator will tap cheaper foreign labour to displace workers in the Australian energy industry.
MST Marquee analyst Saul Kavonic said the Santos board may need to consider the leadership of CEO Kevin Gallagher.
“This is the third time a potential bidder has walked away from Santos during a sale process after looking under the hood,” Mr Kavonic said. “Santos may need to consider a refreshed leadership and strategy going forward, after the current leadership has seen two potential bidders walk away in the space of as many years.
“There should still be an opportunity for Santos to sell down some assets to realise value and fund more growth to deliver for shareholders, but it’s unclear if this can happen under the current leadership.”
He said issues impacting the valuation that were discovered during due diligence, an intransigent Santos approach to the process, and increased awareness of the approvals scrutiny and time frames going forward may all have factored into XRG’s considerations in walking away.
“The Australian government may have signalled to ADNOC that approval for this would not be straightforward, which has contributed to XRGs decision to walk away,” Mr Kavonic said.
“To the extent this is the case, Chalmers is a national hero for helping keep critical infrastructure in safe hands. This process also highlights how some unions need to have a seat at the table from the get go for any major foreign direct investment into Australia.”
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