Kevin Gallagher told industry insiders at the annual energy producer’s conference this year that he believed a merger of Santos – the company he has run for almost eight years – should happen with its larger Australian rival Woodside, in what is further evidence he has been keen for a takeout of the business for some time.
The comments by the Santos chief executive were said to have been made at the Australian Petroleum Production and Exploration Association Conference and Exhibition in Adelaide in May, during an informal part of the proceedings.
Now the two companies are in serious talks about an $80bn-plus tie up, but the view around the market is that they have likely come together after discreet moves by Santos and or its advisers to test appetite for an acquisition by a global competitor.
Banking sources believe the way it likely plays out is Woodside offers a scrip deal for Santos at a premium of about 10 per cent to its share price and Santos holds out for about 30 per cent.
That leads to an impasse around the valuation and it drags on well into next year and either the talks peter out or Santos blinks first and lowers its price, because some believe the need for it to do a deal is pressing.
Or, if there’s no deal and the share price of Santos falls further, a private equity firm that is not averse to investing in oil and gas comes for Santos next year when the share price falls (the talk in the market is that major global rivals aren’t interested in a deal).
In Australia, Santos faces some serious challenges in that its domestic development assets have been bogged down in legal and regulatory delays.
Some question how Woodside even puts a value on its yet-to-be-developed Narrabri gas project in NSW, while its Barossa gas project in the Northern Territory has also faced legal challenges that the company hopes will be resolved early next year.
The merger it embarked on with Oil Search bought it further offshore exposure with projects in PNG and Alaska, but domestically, with the exception of Queensland where it has its GLNG stake, the thinking is that the rest of the portfolio will struggle.
Woodside is also not without its challenges – within the next seven years, it’s up for hundreds of millions of dollars to pay for abandonment liabilities for its Bass Strait project in the Gippsland Basin, which will also be a highly political issue.
Santos shareholders would prefer a company break-up at a premium to the assets’ value to a nil-premium Woodside scrip merger, but it’s unclear who the obvious buyers are for all of the Santos businesses, and the question is what would the company do with the stump of the business that is unable to be sold, such as Cooper Basin assets?
It’s been no easy task running Santos – other chief executives before Mr Gallagher, including David Knox and John Ellice-Flint, who once proposed to merge Santos with Western Mining to create a mini BHP, have faced plenty of scrutiny when it comes to company performance.
And then while some believe that the deal would certainly gain approval from the Australian Competition and Consumer Commission, others aren’t so sure.
Would the Australian federal government really be keen to have just one major Australian domestic oil and gas producer controlling projects on both the east and west coast?
This is with the future ownership of takeover target Origin Energy, which owns part of gas producer APLNG in Queensland, up in the air.
And what about LNG customers from Japan and Korea? They would almost certainly have something to say.
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