Merger of Woodside and Santos faces valuation and asset hurdles, says top analyst

Santos boss Kevin Gallagher is keen to strike a merger deal but a raft of obstacles may lower the chances of a buyout proceeding, according to a top energy analyst.

Santos managing director Kevin Gallagher.

Plans for an $80bn merger between Woodside Energy and Santos may struggle to progress beyond early talks, given a likely valuation gap between the energy producers and added complexity for investors from the combined mix of oil and gas assets, energy analyst Saul Kavonic warns.

While Santos managing director Kevin Gallagher revealed last week that Woodside had approached the company about a merger “a number of times” over the past year or so, investors and analysts are lukewarm on the prospect of a deal proceeding.  One of the biggest hurdles is the perception that Woodside is unlikely to pay the premium demanded by Santos shareholders.

“While Santos investors will be glad to see some structural impetus now under way (even if in desperation) and argue for a premium, Woodside has some convincing to do of the need for any such merger,” Mr Kavonic said.

“Woodside is in the strong position here, so should stand firm on value and leave it to Santos to decide its fate. Perhaps Woodside should simply walk away.

“Ultimately Woodside doesn’t need any deal, but Santos has to do something. In the unlikely event a deal were to eventuate, I doubt Santos investors will realise a typical premium.”

In his end of year message to staff, Mr Gallagher reiterated that Santos had a strong business on a stand-alone basis, which was why it was attracting interest from potential buyers, and said that at this stage, the company’s internal plan remained shareholders’ best option for growth.

Energy analyst Saul Kavonic.

Still, Woodside may only have limited interest in buying some of Santos’s oil and gas assets, further complicating a tie-up as the West Australian major may have to push ahead with side deals to offload unwanted developments. “Woodside only really wants Papua New Guinea. Ultimately, PNG is the only tier one asset Santos has, with the rest second tier (or lower),” Mr Kavonic said.

“In any merger scenario, Woodside may want to spin off a number of Santos assets they don’t want, including WA gas/oil, GLNG and Cooper Basin, but it’d be a struggle to find a buyer for good value.”

Woodside boss Meg O’Neill also faces the danger of muddying her reputation should a big transaction with Santos fail to replicate the relative success of its merger with BHP’s petroleum arm.

“Woodside’s risking a lot in even contemplating this. Woodside has remedied its reputation over the last two years and become a leading tier one energy company in the region again,” Mr Kavonic said.

“But if Woodside engage in a merger that disappoints, it will be honeymoon over for management, a tough slog ahead, and we will rightly question if all the old bad M&A habits ingrained in Woodside – that saw it underperform for many years last decade – are back.”

Activist investors have previously expressed unhappiness with Santos’s valuation.