Nick Evans
Failure of Woodside merger talks ramps up pressure on Santos to bridge the gap between promises and delivery
With the prospect of a Woodside merger off the table, the market will now find out who is chained to who through Kevin Gallagher’s $6m golden handcuffs.
The merger broke down because neither side could agree on valuation. Santos wanted a full takeover premium built into a scrip-based merger, and Woodside was only prepared to stump up a “skinny” 5 to 10 per cent over Santos’ market valuation – and preferably the valuation before news of the talks leaked out, not after.
The decision leaves Gallagher with all of the work to do, with Woodside’s Meg O’Neill free to pursue opportunities outside of Australia.
On the face of it, Santos is in a far better position than it was in early December, when news of the Woodside talks broke, after seeing off a legal challenge to its Barossa gas project.
In his message to Santos staff on Wednesday regarding the end of the Woodside talks, Gallagher was at pains to note the “big year of progress” ahead of the company.
Under the company’s timeline, Barossa is due to come into production in 2025, with its Pikka project in Alaska coming online in 2026.
But there are still plenty of clouds hanging over the company.
If Santos reverts to its undisturbed price when the boost from the Woodside talks fades, Gallagher will still face much the same pressures from shareholders over the company’s lagging valuation.
Dissident shareholders, including L1 Capital, still want the company to split its LNG and onshore into separate vehicles – a topic still presumably being considered alongside the due diligence investigations. That pressure will only intensify in the wake of Woodside’s decision to walk away.
The court decision on Barossa clears up one major overhang for Santos, but the prospect of a new round of political turmoil in PNG raises the risks around Santos’ best portfolio assets.
Warnings by former PNG petroleum minister Kerenga Kua of political interference in the TotalEnergies-led Papua LNG project throw a significant shadow over a major growth plank for Santos.
Added to that is the uncertainty around the completion of a deal with PNG’s state-owned Kumul Petroleum to sell down a 2.6 per cent stake in PNG LNG for $US736m, with Kumul only able to stump up $US352m as a part-payment by the January 31 deadline – now extended yet again.
Santos’ position in PNG is the jewel in its corporate crown. The latest troubles in the country played no role in Woodside’s decision to talk away from a deal, but problems in the country won’t help Santos’ case for a revaluation by the market.
Ahead of the Woodside talks, a real sense was developing that Santos was drifting rudderless.
Gallagher complained at Santos’ December investor day of frustration at the company’s market valuation – but analysts walked away warning of a deteriorating dividend outlook and falling free cashflow levels.
Gallagher reshuffled his management team ahead of the launch of formal merger talks, but their failure now suggests there will be no broader reset of the company’s culture or direction, with a succession vacuum directly tied to the Santos board’s 2021 decision to offer him a $6m golden handcuff.
Put simply, Gallagher has to deliver.
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