Santos blindsided as Abu Dhabi’s XRG walks from $30bn deal
Late Wednesday night, Abu Dhabi’s XRG consortium, led by the Abu Dhabi National Oil Company (ADNOC) and Carlyle, walked away from its $US5.62 ($8.45) a share cash offer. The decision, made just days before an extended due diligence deadline, blindsided Santos’ board.
Investor scepticism had already been mounting. With Santos’ shares trading at $7.65 earlier this week – a significant discount to the indicative bid – and three deadline extensions behind it, confidence in a deal materialising by Friday was waning. On Thursday Santos shares fell 12 per cent to $6.74, their lowest level since June when indicative pricing was first pitched.
XRG’s exit now leaves the cashed-up consortium seeking other options to bolster its gas portfolio. Australia, with its abundant LNG reserves and proximity to Asia’s energy-hungry markets, remains a priority. However, there’s next to no appetite to make another run at Santos, in the near term, at least.
Importantly, XRG expressed confidence in Australia’s investment environment and the trade relationship, and highlighted the constructive engagement with Canberra through the process.
While gaining approval for Santos was always going to be complicated, internally XRG didn’t see the foreign interest test as a deal-breaker, and it was sympathetic to the political desire to get more gas into the east coast market. That’s why XRG gave commitments to spend up big extracting more gas out of the fast maturing Cooper basin to keep gas flowing for domestic use. Santos privately claims XRG was cool on being locked into domestic gas sales.
The collapse, now spares Treasurer Jim Chalmers from the politically fraught task of approving a foreign takeover amid growing union unease. For its part XRG had pledged to maintain Santos’ structure, viewing the acquisition as a diversification strategy rather than a dismantling exercise.
This marks the third failed bid under Santos’ leadership duo of CEO Kevin Gallagher and Chairman Keith Spence. The first, a $21bn offer from Harbour Energy in 2018, faltered amid accusations of poor engagement and unrealistic valuation expectations. More recently, discussions with Woodside Petroleum fizzled before gaining they began.
Few management teams can survive the spectre of three bids not even getting past first base, and big investors will be pushing hard for a fresh leadership at Santos to given them confidence the current strategy is the right one.
While Woodside was a reluctant suitor from the outset, the latest breakdown has striking similarities between the short-lived Harbour affair – then valued at $21bn and spearheaded by former top Shell executive Linda Cook. There Santos was accused of failure of engagement, a company full of short term surprises and a board with unrealistic expectations of value.
On the last point, it is understood today’s bidder XRG struggled to see how it could get to the proposed $8.45 price based on the current portfolio. If Santos had more in its reserves or better flowing wells, Abu Dubai couldn’t find them. Investors have long been cool toward Santos for this very reason.
Just four weeks ago, on granting XRG a third extension to reach an agreement, Santos’ Gallagher said there was “nothing in the due diligence that would make it (the consortium) consider withdrawing”. That shows how quickly it unravelled.
Santos’ insistence that XRG shoulder a looming tax liability tied to its Papua New Guinea LNG project further strained negotiations. The withholding tax liability, inherited from Santos’ 2022 acquisition of Oil Search, only activates when there’s a change of shareholder control. The size of liability was difficult to quantify and with the price already fully valued, XRG baulked at Santos’ insistence they cover the tax.
Compounding concerns, a long-term methane leak at Santos’ Darwin LNG plant — known internally for five years but revealed publicly only last month — added to the consortium’s unease. After intensive due diligence, XRG’s team only found out about the leak when the story appeared in the media. Santos bankers have strongly disputed XRG was kept in the dark on these issues.
In a statement, XRG cited “a combination of factors” influencing its decision, including “all commercial considerations” and Santos’ deal terms. While maintaining a “positive view” of Santos’ business, the consortium ultimately deemed the transaction unviable.
With the share price fall and a rattled investor base, Santos now needs to prove it has the means to go it alone. There’s increased confidence on a decision around the Papua New Guinea LNG expansion early in the new year, but less confidence in how to fund it.
Early Thursday Santos said the XRG consortium failed to agree on “acceptable terms” that “protected the value” of the proposed deal for its shareholders. Additionally, XRG did not accept a fair allocation of risk, including securing needed approvals and committing to domestic gas supply.
Santos “has a clear strategy, strong leadership and high-quality growth opportunities,” chair Keith Spence said in a statement. Production is expected to increase by 30 per cent within the next two years backed by the new Barossa offshore LNG project and the Pikka oilfield in Alaska, Santos added.
MST Marquee energy analyst Saul Kavonic says this is now a good opportunity for Santos to sell down some assets to fund growth options including in PNG and this will help deliver for shareholders. But there’s a catch. “It’s unclear if this can happen under the current leadership,” he cautions.
For Santos, the big challenge now is not just to rebuild investor trust, but to show that its long-term strategy is more than a series of missed opportunities.
johnstone@theaustralian.com.au
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