Santos, Woodside in focus as buyout prospects

Santos chief executive Kevin Gallagher. Picture: Morgan Sette

With Santos and Woodside Energy trading below their North American peers, the two local resources giants are back in focus surrounding a potential buyout.

North American groups like ConocoPhillips and Chevron are ascribed far higher valuations and, more broadly, many believe it makes sense for the world’s largest oil companies to consolidate the global market.

Any move would come hot on the heels of the consolidation already seen in the global pandemic, where Santos paid $21bn for its listed rival, Oil Search, and Woodside purchased BHP’s petroleum business.

But the challenge for Santos and Woodside is that they are sometimes avoided by institutional investors, which want to tick all the boxes from an ethical investing perspective, because they are producers of fossil fuels.

If a major doesn’t buy Woodside or Santos, another option is the pair get together.

The understanding is that Woodside has weighed a merger before.

A tie-up would be unlikely to create concern from the Australian Competition and Consumer Commission.

Santos is trading at about nine times its earnings and Woodside 12 times so they are not too far apart on price when talking about a scrip deal, and the pair could gain funding benefits by being together.

But the argument against a move is that Santos would want more for its business than Woodside is prepared to pay, and Woodside’s focus is expansion in America whereas Santos is more skewed to the domestic gas market.

Santos has been led by Kevin Gallagher, who started in the top job in 2016, so an exit from the top role may not be too far in the future anyway, given he’s been there for eight years.

Sources say that there’s been a growing frustration from Santos insiders that its share price has been stubbornly stuck at around $6 when they believe it’s worth more like $10, but they have stopped short of putting the shingle out for a sale.

Others believe that the company would be open to a sale at the right price, but global groups would be more attracted to a business like Woodside that has more international asset exposure.

There were suggestions earlier in the year Santos could be in the sights of a buyer but, at that time, analysts disagreed that it was cheap, arguing it was efficiently priced in the market.

Another factor is Santos’s lucrative Barossa offshore gas project in the Northern Territory that is still facing legal opposition for development, but that is likely to be concluded around January, with the project planned to start in 2025.

BP could also be a logical buyer, say sources.

Any deal could take some time to play out but the thinking is that the stocks will be closely watched for those looking to capitalise on buyout opportunities in the new year.