Divided investor agendas could thwart Woodside’s Santos play

Oil and gas deals are transacting around the world at a premium of about 10 to 15 per cent, but some expect Santos shareholders will want a premium more like 40 per cent.

Investors are expecting a buyout proposal to be on the table for Santos from Woodside by the time the two groups report their results next month, but they are not holding their breath for a knockout price for the $25bn Australian listed gas operator.

Santos could have some work to do getting Woodside to pay up for its business, but then again convincing its shareholders to sell at a price in line with other industry deals could be the real challenge.

Oil and gas deals are transacting around the world at a premium of about 10 to 15 per cent, but some expect Santos shareholders will want a premium more like 40 per cent, which some analysts believe is highly unrealistic.

When ExxonMobil last year announced a buyout of Pioneer Natural Resources in a scrip merger that valued the target at $US59.5bn, it was a 18 per cent premium to Pioneer’s share price on October 5 and a 9 per cent premium to its prior 30-day volume-weighted average price on the same day.

Sources say that Woodside is close to finalising due diligence on Santos if it is not completed already.

A premium anything less than 20 per cent is unlikely to be enough to get Santos shareholders over the line.

And some are even suggesting that the price may be as low as a 10 per cent premium.

Already, the stock is trading at an 8 per cent premium from when Woodside confirmed it was in talks about a deal.

The understanding through unofficial channels is that while Santos shareholders want a cracking price, at the same time Woodside shareholders are not thrilled about the prospect of a merger and will take some convincing by the company.

There’s not really any major synergies and the strategic rationale is not seen as overly compelling.

Also, the Santos shareholder base includes shareholders searching for value and growth opportunities, whereas Woodside shareholders are largely there for attractive and low-risk dividend payouts.

Globally, premiums for oil and gas mergers are lower than the 30 per cent premium usually required to get a buyout across the line because smaller operators are under pressure to get bigger.

They are finding it hard to fund projects themselves as financiers shy away from exposure to fossil fuels due to the environmental concern.

And if you are a smaller player, you do not have the scope to do higher grade projects – instead you develop those in front of you.

Santos is unlikely to be in a position to fund all its development options, so Woodside could assist it in this area. Woodside not only has the capability to develop projects, but the government relationships to smooth the way for them to eventuate.

Woodside was applauded for its deal in recent years to buy BHP’s global petroleum portfolio, but there’s a lot out there thinking that it risks alienating its register with a Santos purchase and the board should quit while it is ahead.

You only need to ask BHP how one major misstep in the mergers and acquisition arena takes years to repair from a reputational perspective.

The mining giant paid top dollar for shale gas assets in the US through the acquisition of Petrohawk Energy Corporation in 2011 and assets from Chesapeake Energy, outlaying more than $US20bn in total, only to sell its shale assets in 2017 for $US10.5bn to BP.

But some believe Santos will do everything in its power to get a deal across the line after courting prospective buyers for the past six months.

Yet global groups like ConocoPhillips and ExxonMobil would have better synergy benefits with the assets and have passed on the opportunity.

Even if this deal does not see the light of day, it sends a clear signal to the global energy market – Santos is well and truly for sale.