Analysts at Morgan Stanley believe that Santos should sell off Oil Search’s Alaska business should it succeed in a merger deal.
In a Morgan Stanley research note, the analysts said that a ratio where Oil Search shareholders owned 40 per cent of the company and Santos the remainder was one that was more likely to be given support from both sides.
On Tuesday, details emerged of a $23bn merger proposal under which Santos would own 63 per cent of the combined entity and Oil Search the remainder.
Morgan Stanley said this implied no value for Oil Search’s Alaska asset.
While the current offer was attractive for Santos, it was probably not achievable, the analysts at Morgan Stanley said.
With Santos holding 60 per cent of the entity, it implied a value of $4.50 per share for Oil Search.
Santos was trading on Wednesday at midday at about $6.62.
Analysts said they believed there were risks in Santos developing the Oil Search Alaska asset and it would be better for the company to stage an exit from this project on the back of a successful merger.
This is given it would potentially dilute Santos’s credentials from an environmental, social and governance perspective.
“There is financial risk and Santos brings negligible experience in that part of the world,” the analysts said.
“If Santos can find a partner to buy the Alaska asset, potentially Santos could bid more for the remaining business.”
Morgan Stanley analysts said the bulk of Oil Search’s value was tied up in low-cost, relatively long-life gas assets in Papua New Guinea with significant resources.
“This is attractive to Santos as it means Santos can reduce exploration spending and develop Oil Search’s resource base at an appropriate time.”
Oil Search’s resource base is valued at close to nil by the market, which Morgan Stanley analysts said underpinned a valuation gap.
Clearly, they said, there was a risk that Santos would pay too much for Oil Search, although they said the current offer looked more favourable to Santos than Oil Search shareholders.
“That said, pressure will build on the Oil Search board to engage, given there are concerns on the Alaska selldown, the company is without a CEO and other executive turnover has been high.”
UBS analysts said they were also supportive of the merger but believed the ratio would need to be lifted to about 0.60 Santos shares per Oil Search share from 0.589 shares currently offered under the proposal.
But they said beyond this, it would be value dilutive to Santos shareholders.
Analysts at JPMorgan believed a ratio of 0.65 to 0.69 Santos shares for every Oil Search share was more appropriate.
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