Woodside needs to pay $28bn-$29bn for Santos says Macquarie

An amateur Fisherman passing an LNG ship in Darwin Harbour. Picture: Glenn Campbell

As Santos and Woodside advisers have spent this week exchanging information and speaking to shareholders, analysts continue to assess the merits of an $80bn-plus tie up between the country’s two largest listed energy groups.

Analysts at Macquarie believe that the discussions between the two parties for a merger, which have they have both confirmed to be on foot, have merit.

Key attractions for a tie-up are scale in liquefied natural gas, growth diversity, stronger free cash flow and synergies for Woodside’s Sunrise operation with Darwin LNG.

They say that the deal could create synergy benefits of between 45c and 70c per Santos share (shares in Santos are currently trading at about $7.52 with its market value at $24.4bn).

The synergies would include $US125m to $US200m of annual costs, $US35m to $US45m annually for trading uplift of LNG and $US500m to $US900m value in progressing Woodside’s Sunrise development through Darwin LNG, but a $US100m one-off acceleration of tax losses.

Based on this assessment, analysts expect Woodside would need to offer 29c to 30c of Woodside shares per Santos share, equating to an offer of between $8.70 and $9 at the current Woodside price.

This would mean Woodside would be buying Santos with its scrip for between $28bn and $29bn.

Yet they add it remains to be seen if Woodside will progress to an offer and/or if offshore bidders for Santos will emerge, now the company is in play.

Macquarie says that Woodside needs to make a case to its shareholders that buying Santos is the right deal compared to others.

“It failed to do this with its Oil Search (play in 2015), and that deal fell apart,” the analysts said in a research note. “The longer it takes, the lower the probability of a successful deal.”

The analysts said that the deal could also be beneficial in recognising value for the Darwin assets and the Santos Alaska assets.

Woodside would obtain material free cash flow accretion, and could deliver superior free cash flow-based dividend outcomes versus Woodside’s existing proposition at the recent Investor Day, the analysts said.

Macquarie analysts have a price target on Santos of $31 per share.

The analysts argue a tie-up could increase production growth for Woodside, currently at a compound annual growth rate of 1.8 per cent to 2030 compared to 7.6 per cent for Santos, as North West Shelf and Pluto declines for Woodside become more apparent.

The merged entity would have 4 per cent CAGR after the sale of Cooper Basin and Macedon assets, which they assume would be divested.

The analysts said the Woodside investor day on November 8 showed a deteriorating dividend outlook and disappointing free cashflow outlook, with Macquarie estimating dividend would decline from 6 per cent this year to 2 per cent in 2026.