Oil Search to ‘fight off’ Santos merger: analysts
Oil Search will seek a higher bid from Santos amid valuation doubts in the $23bn merger pitch, according to analysts.
Oil Search’s board is likely to resist a $23bn merger tilt from Santos due to valuation concerns as its share price nears the implied value of the deal, while Santos investors will be wary of engaging in a bidding war, analysts say.
Santos chief executive Kevin Gallagher revealed on Thursday he expects to deliver $US1.1bn ($1.5bn) of free cashflow for the 2021 financial year, assuming current oil prices along with an upgrade to its annual production guidance, underlining the current strength in its business.
Oil Search rejected Santos’s all-share offer, which would have given it 37 per cent of the combined company. The deal implied a price of $4.25 per Oil Search share compared with its Monday closing price of $3.67, the day before the deal became public. Oil Search closed at $4.08 on Thursday, up 1 per cent.
“The Oil Search share price has risen to the levels near the Santos merger offer. Despite this, at the current share price, the Oil Search board will likely believe that a merger with Santos would not provide full value to Oil Search shareholders. As a result, we expect the board to fight off the merger attempt,” WoodMac senior analyst Daniel Toleman said.
The Papua New Guinea producer is probably right to hold out for a better bid given ExxonMobil’s share and cash deal for InterOil was at a 42 per cent premium in 2016 while Woodside Petroleum’s takeover offer was also at a higher level, Bernstein said. Santos shareholders, however, may be wary of adding much more to the merger deal.
“For shareholders, attention is now focused on the Oil Search and whether Santos will up their offer. We expect it will be competitive. However, a bidding war is the last thing investors will want,” Bernstein analyst Neil Beveridge said.
Still, Oil Search shareholders needed to be aware that if the merger deal fell through they faced an uncertain outlook with no CEO and issues in sanctioning Alaska, MST Marquee said.
“I do think for Oil Search we need to remember the alternate scenario, where no deal happens, and we are back to a world with no CEO, likely a few less board members and clearly greater challenges on progressing Alaska,” MST Marquee analyst Mark Samter said.
Santos upgraded its guidance on Thursday as part of its quarterly results and the company had other levers to unlock value and boost its share price, MST said.
“Having watched Kevin operate this past 5 or so years, I think it would be foolish of us to think he might not have a few nice little tricks up his sleeve – it would seem very un-Kevin-like to enter into a scrip bid for someone with any bad news about to drop and far more logical to assume quite the opposite,” Mr Samter said.
”Clearly, as I have discussed before, I think there are far greater opportunities to extract value than the market may realise in this deal, both through asset optimisation in PNG (where Santos hold a very valuable blocking veto over Papua) and in being willing to sell operator-ship in Alaska.”
Santos increased its 2021 production guidance to 87-91 million barrels of oil equivalent from a 84-91 mmboe range while sale volumes were also upgraded to 100-105 mmboe from 98-105 mmboe previously.
Its upstream production cost guidance fell to $US7.90-$US8.30 from $US8.00-$US8.50 while its capital expenditure remains at $1.6bn for the full year.
Oil Search has been in turmoil after the exit of CEO Keiran Wulff on Monday.
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