Oil Search under pump to open $23bn Santos merger talks
Oil Search faces shareholder pressure to hold talks with Santos over a $23bn merger creating Australia’s biggest oil and gas producer.
Oil Search faces shareholder pressure to hold talks with Santos over a $23bn merger creating Australia’s biggest oil and gas producer with chairman Rick Lee facing pressure to step down after bungling communications over the takeover approach and rejecting the tie-up approach.
The Papua New Guinea gas producer said while it saw logic in the mega merger, it would only engage on a fair deal for investors which the terms of the Santos tie-up “were demonstrably not”.
The proposed terms represent a premium of only 6.8 per cent despite Santos shareholders owning 70 per cent more of the equity than Oil Search shareholders, Oil Search said.
Santos revealed on Tuesday it sent a merger proposal to Oil Search on June 25, plotting a deal which would have given it 63 per cent control of the combined company and boasting a market capitalisation bigger than Woodside Petroleum. Oil Search shareholders would receive 0.589 new Santos shares for each of their own, implying a bid price of $4.25 per Oil Search share or $8.8bn.
Oil Search – in turmoil after the sudden exit of chief executive Keiran Wulff on Monday over behaviour issues – rejected the offer with the company forced to clarify a statement by Mr Lee on Monday that it had not received any takeover approaches in a fiery call with investors.
Several of the target’s high profile investors said Mr Lee and the board must reconsider their approach given the opportunity to tease a better deal out of Santos.
“The key focus is to make sure the Oil Search board engage on proposals whether it’s Santos or anybody else because we do think there’s a lot of value to be unlocked there,” said Blake Henricks, portfolio manager with Firetrail Investments which holds both Oil Search and Santos shares.
“We’re not saying they absolutely should just roll over and take it. But what we are saying is they definitely should be exploring any proposal.”
Oil Search shareholder Allan Gray said the company’s board must open up talks.
“I absolutely think they should engage. Based on their announcement of this afternoon, it hopefully sounds like they will,” Allan Gray managing director Simon Mawhinney said. “It’s crazy these approaches are made without boards making it known to shareholders so they can be held accountable for their decisions.”
Should Lee step down?
The board’s handling of Mr Wulff’s resignation, rejecting the Santos bid, poor capital allocation and being forced to backtrack after denying any takeover interest has also sharpened calls for Mr Lee to consider stepping down.
Oil Search shareholders are likely to push the company to engage further on talks, MST Marquee analyst Mark Samter said, who also called for Mr Lee to quit.
“I think there has already been a total dereliction of duty from the Oil Search board in not engaging with Santos on this bid,” Mr Samter said. ”My sense is that they will get a very strong message from their shareholders today to engage, so it will be an even larger dereliction of duty to not now start acting in the best interests of shareholders.”
Allan Gray said it was disappointed by the board’s conduct.
“They categorically denied they had received any approaches on their investor call and then only this morning they clarified that statement,” Mr Mawhinney said. “I’m sorry that’s not clarifying, it’s changing what is completely factually inaccurate. It’s really disappointing.”
The potential tie-up would create a new force in Australia’s oil and gas sector with gas operations spanning both coasts of Australia, Papua New Guinea and an oil project in Alaska that has still to be sanctioned.
It would have a market capitalisation of $23bn, positioning the merged company in the top-20 ASX-listed companies and the 20 largest global oil and gas companies.
Oil Search is facing pressure to be able to finance Alaska amid a climate crackdown with Santos pitching a bigger combined company could “self-fund” growth options like Alaska while keeping an investment grade credit rating.
Santos received a letter from Oil Search on July 9 rejecting its offer, although it has since been trying to engage with the target’s board since.
“The potential merger of Santos and Oil Search is a logical combination of two industry leaders to create an unrivalled regional champion of size and scale,” Santos said in a statement to the ASX.
The proposal involved Santos boss Kevin Gallagher remaining as the chief executive of the merged company. The identity of the chairman for a proposed merger has not been determined.
Numerous approaches
Sources said energy company Santos is understood to have made numerous approaches to Oil Search about a merger deal in the past six months, with the two companies already partners in the PNG LNG venture.
Last year, Oil Search came under pressure when the oil price plunged to about US$45 per barrel on the back of the global pandemic, prompting the approach from Santos.
However, Oil Search is thought to have not shown interest in a merger with Santos, which is understood to have been expressed in meetings with its rival.
Speculation first emerged in 2019 that Santos was circling Oil Search after fending off suitor Harbour Energy.
Former boss Peter Botten was making plans for his exit and there was fresh political uncertainty in Papua New Guinea, which had been weighing on its share price at that time.
Analysts have always believed that Santos and Woodside Petroleum are the most likely suitors of Oil Search.
However, relations were then said to have cooled between Woodside and Oil Search after former Woodside boss Peter Coleman made a $11.6bn play for the PNG-focused Oil Search in 2015 that was swiftly rejected.
At that time, some thought it may have been too early for Santos to make its move, but most did not doubt the company would find Oil Search attractive at a time it was searching for more gas reserves.
One of the deterrents for a deal then by Santos was thought to be a final investment decision on a $US13bn PNG LNG expansion project which has yet to transpire.
Oil Search rose 6.3 per cent to $3.90 while Santos fell 5 per cent to $6.49.
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