Oil and gas giants Oil Search and Santos are understood to have agreed terms on their $21bn merger and are on track to announce a final deal next week.
While delivering a $139m net profit for the six months to June, Oil Search said on Tuesday that due diligence was being undertaken for a proposed merger with Santos in which Oil Search shareholders are offered 0.6275 Santos shares for every share held.
It comes after Santos offered Oil Search 37 per cent of the merged entity instead of 38.5 per cent under the current offer.
Both parties have been carrying out due diligence, but it is understood that the transaction is on track to being finalised next week.
The groups are shareholders in the PNG LNG project, with Oil Search holding 29 per cent and Oil Search 13.5 per cent.
Last year, Oil Search came under pressure when the oil price plunged to about $US45 a barrel on the back of the pandemic, prompting the interest from Santos, which is one of Australia’s major domestic gas producers with stakes in assets such as the Darwin LNG and Gladstone LNG plants.
Santos put a merger proposal to Oil Search last month.
This latest Oil Search proposal, along with an agreed proposal for Woodside to buy BHP’s petroleum business for close to $20bn, are two of the largest acquisitions in Australian corporate history as the energy industry remains under pressure to consolidate.
With environmentally friendly investors and lenders – nervous about their corporate image when it comes to environmental responsibility – shunning oil stocks, the thinking is that larger groups will have an easier time funding projects.
This includes developments such as the Alaskan Pikka project being carried out by Oil Search and Woodside’s Scarborough gas field off Western Australia.
The Santos-Oil Search transaction makes the company one of the 20 largest energy groups in the world, but should Woodside’s merger with BHP petroleum go ahead, it will still be the nation’s largest energy producer. While Santos boss Kevin Gallagher will be the chief executive of the merged entity, the makeup of the board has yet to be determined.
Experts believe the merger will now lead to consolidation among smaller players such as Beach Energy, Senex and Cooper Energy, as scale becomes increasingly important.
Working for Santos are Citi and JB North & Co, while Oil Search has called on Goldman Sachs, Macquarie Capital and Rothschild.
Oil Search also owns a 22.8 per cent share in the Papua LNG development.
Santos closed up 3.19 per cent at $6.14, while Oil Search rose 2.97 per cent to $3.81.
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