Merger talk aplenty in energy sector, but analysts don’t buy it

Santos, led by chief executive Kevin Gallagher, embarked on a $21bn merger with Oil Search in 2021, making some think it’s now too big to be a buyout possibility. Picture: Mark Brake

With the share price of Santos trading off in the past year, could it be that the $23bn Australian energy group is now at an attractive price for a rival to launch a takeover?

Santos embarked on a $21bn merger with competitor Oil Search in 2021, and some think this now makes it too big to make it a buyout possibility.

But two logical candidates would be US-based Chevron or ConocoPhillips, both enjoying strong cash flow generation on the back of the elevated oil price.

Citi analysts don’t agree about the Santos share price being too cheap.

They say in research released to coincide with the group’s quarterly update that they believe Santos is efficiently priced by the market, and its share price adequately reflects most risks facing the assets into the cost of equity.

Santos delivered its quarterly update on Thursday, and chief executive Kevin Gallagher said that the company continued to perform strongly against the backdrop of regulatory and economic uncertainty, referring to the introduction of caps on east coast gas prices.

Drilling at its Barossa project is expected to start by the end of this year, which Citi analysts say is later than prior expectations of mid-year.

The analysts said its first quarter, volumes were in line with Citi’s forecasts and sales revenue beat their expectations by 4 per cent, but they were 9 per cent below the broader consensus amongst analysts.

Another bold suggestion is an acquisition initiated by Woodside, although most believe its focus is firmly on opportunities off the coast of the United States where the Gulf of Mexico assets it inherited from its BHP petroleum business purchase are based.

Meanwhile, the other energy group that continues to be a topic of discussion when it comes to mergers and acquisitions in the oil and gas space is Beach Energy, which has some analysts wondering if it is once again being shopped around the market to test buyer appetite.

As previously reported by this column, the belief is that the Ryan Stokes-headed Seven Group Holdings, a 30 per cent shareholder, would be open to a sale if a buyer could be sought at the right price.

Again, a suggestion is Woodside Energy could buy the $3.35bn Beach Energy to give it a pipeline of new east coast projects because the Gippsland Basin oil and gas development in Bass Strait that it inherited from BHP is nearing the end of their life.

But the executive that Woodside has recently hired to focus on mergers and acquisitions is based in the United States, which is further evidence its focus is more off shore for deals.

Another idea is Santos could buy Strike Energy or Beach Energy, after selling down PNG assets inherited from Oil Search.

Last week, Santos won a court case where it was awarded $1.4bn against contractor Fluor over its Gladstone GLNG project in Queensland, but with the money, experts say it will likely accelerate its investment into its Narrabri gas project in north eastern NSW.

Other sources believe it has plenty of wood to chop before it starts buying other businesses.