Why the ASX may never see another Santos

Santos is being chased after it has almost finished most of its major capital spending on big projects in Alaska and Australia. Picture: iStock

The near $30bn buyout plan by the Abu Dhabi National Oil Company for Santos will likely sail through after eventually gaining regulatory approvals, and it’s yet just another deal that is gradually reshaping the make-up of the ASX.

Over the last five years or so, the ASX has lost most of its large infrastructure asset owners, almost all of its building materials stocks, and now a second major oil and gas player, Santos, looks like it is going after Oil Search merged with Santos in 2021.

As for listed major oil and gas companies, only Woodside remains, which has also recently been discussed as being in the sights of major players, such as BP.

The common denominator of all of the groups is that they are all quite capital intensive.

Manufacturing companies are also disappearing from the bourse with a lot of manufacturing moving offshore, with James Hardie being the latest to move its main operations to the US, and infrastructure is proving a theme with big pension funds looking for a place to store funds.

But by in large, equities investors are also chasing a growing number of companies that do not have to invest a lot of capital upfront to get a strong return. This includes technology stocks and consumer companies.

Also out of favour with investors are mining services providers and services groups in general, which all require a lot of capital spending on machinery and equipment.

Miners are capital intensive and form a large part of the Australian market, and they do not look like they will disappear anytime soon, but do not trade at such high multiples as stocks in less capital intensive sectors.

It’s a similar trend playing out in the United States.

As of May, of the companies listed on the ASX200, 34 per cent were financials, 18 per cent materials, healthcare 9.4, consumer companies almost 8 per cent, 7 per cent industrials and almost 7 per cent real estate stocks.

In 2015, financials were 47.6 per cent, materials 14.8, industrials 7.1 and consumer 6.6 and healthcare 6 per cent.

Information technology and communication services comprised close to 7 per cent combined.

In the case of Santos with its latest $8.89 per share offer that followed an $8 offer on March 21 and another $8.60 offer on March 28, most expect the deal to proceed.

Santos has largely been considered as unofficially for sale for at least a year, with talk it had been shopped internationally before it held talks with rival Woodside about a year ago.

But there were not thought to be interested buyers from overseas.

The Abu Dhabi National Oil Company is tipped to have been sniffing around for a while, but the question mark was over whether it would follow through with an offer.

It’s since formed a new venture, called XRG, which allows it to embark on major transactions with ease.

Carlyle, with which it is bidding for Santos, may end up as the owner of the Santos domestic gas assets in Western Australia and Cooper Basin.

ADNOC is doing this deal after putting the finishing touches on a €15bn ($26.7bn) purchase of German chemicals company Covestro.

Santos will be used as an Asia Pacific investment platform as part of a global LNG business as ADNOC looks to diversify away from the Middle East amid a period of escalating geopolitical tensions.

From a capital spending perspective, the Middle Eastern buyer has timed its offer well, because Santos, which will still be run by Kevin Gallagher once purchased, is now most of the way through its capital spending work on its Barossa project off Australia’s northern coast and Pikka in Alaska.

Santos has recommended the transaction, which is expected to get investor backing, as it is a 28 per cent premium to the last closing price of $6.96 per share.

Santos shares are up almost 6 per cent in the past year and over 40 per cent in the past five years.

Goldman Sachs, Rothschild & Co and J.B North & Co worked for Santos and JPMorgan worked for the buyer.

While the deal needs Foreign Investment Review Board approval, most think it will go through subject to certain conditions.