Oil Search slippery slope paves solid ground for Santos
The Santos tilt at Oil Search was finally confessed to the market on Tuesday by the target company after disavowing the rumour at a full analyst briefing less than 24 hours earlier.
Santos CEO Kevin Gallagher’s timing is choice. The Oil Search board has rebuffed the bid, but will Gallagher really have to lift his offer, or just watch Oil Search unravel as more comes to light around the very unfortunate story of its CEO Keiran Wulff?
Take a very serious question around disclosure to the market: a sell down last month by one of Oil Search’s substantial shareholders, the Abu Dhabi government owned Mubadala Petroleum.
This is a “who knew what when” story that undermines the credibility of Oil Search chair Rick Lee and his board just when they need it most to defend a takeover against one of the smartest players in the gas game.
In late June, analysts started receiving a bounce back email from Oil Search CEO Wulff. It said that he would be out of the office until August. Odd.
We now know that Wulff’s career was imploding. The Oil Search board was dealing with a whistleblower complaint against him from within the company and have launched an investigation. The board had already investigated a reportedly terse meeting between Wulff and incoming CFO, Ayten Saridas last year which appears to have triggered her abrupt resignation without any satisfactory explanation to the market.
The Australian has reported a series of complaints about Wulff’s bullying behaviour in three countries. The market is now looking back to 2 July 2014 when Wulff abruptly “relinquished” his position as managing director of Buru Energy, again without explanation.
When Wulff was placed on sick leave in late June, how long do we think board members had been aware they had a ticking time bomb on their hands? On that board was a representative of Mubadala Petroleum.
On 24 June, Mubadala announced to the ASX it was selling down its substantial shareholding in Oil Search. This surely raises questions of inside knowledge and market disclosure. Was it appropriate for Mubadala to sell stock, knowing that an investigation was ongoing and not disclosed to the market from the middle of June?
We also now know that Santos had been in talks with Oil Search for around six months about a takeover. Both Wulff and Gallagher were in Perth at the APPEA conference on 14 June.
On 25 June, Santos lobbed in a formal scrip offer for the company which was then rebuffed by the Oil Search board on 9 July.
Now why didn’t Santos buy the Mubadala holding? Answer, Gallagher didn’t want to pay cash.
More interestingly, with Oil Search looking wobbly in late June, why didn’t the other big multinationals with interest in Oil Search projects buy the Mubadala holding, which at least would have delivered a blocking stake on a takeover by another big player. It appears, neither Exxon, nor the French Total were interested enough.
It all puts Gallagher and his board in pole position. Gallagher is looking for growth. The big projects of Barossa and Dorado are arguably already priced in. Santos is a partner with Oil Search in its flagship PNGLNG project. A merger could de-risk any redeterminations on a “true up” of reserves there. And the deal would also take in the Papua LNG project where Santos is not a player and so would align its PNG assets for growth.
Oil Search’s relatively new Alaskan oil assets, bought at least in part as a takeover deterrent could then be off-loaded to bolster the balance sheet.
“Santos’s interest in Oil Search can indicate that Santos management see limited material upside left in the share price without M&A with the easy wins behind them” said Credit Suisse analyst Saul Kavonic. “We have long seen a logic in a merger on cost synergy and PNG joint venture alignment grounds alongside benefits of diversity and scale.”
If Gallagher picks up Oil Search, he will be running a business bigger than Woodside, a company where he was passed over for the top job in favour of Peter Coleman in 2011. In 2015, Coleman made an unsuccessful $11.6bn bid for Oil Search.
In the battle for talent to replace Coleman as Woodside chief this year, the Santos board put golden handcuffs on Gallagher with a $6m incentive to stick around.
If he pulls off Oil Search, and delivers upside, he will be worth every cent.
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