Santos has proposed a merger with Oil Search to create a $22 billion energy “champion”
Santos has ambitions to be one of the 20 largest companies on the ASX, proposing a $22 billion merger with Oil Search.
Santos wants to create an “unrivalled regional champion” in the oil and gas space through a $22bn merger with Oil Search - an offer which has so far been rejected.
But the idea is far from dead, with the Sydney-based, Papua New Guinea-focused Oil Search saying it agrees there is “strategic logic in a combination of the two companies”, but the price offered was not up to scratch.
The deal pitched by Santos on June 25, after rumoured months of talks, offered Oil Search shareholders 0.589 Santos shares for each Oil Search share they owned.
Oil Search shareholders would have ended up with 37 per cent of the $22bn merged group and Santos shareholders would have owned 63 per cent.
But the Oil Search board said on Tuesday the offer was “demonstrably not” fair to its shareholders, but added “it is open to receiving a revised proposal’’.
For its part, Santos said it believed the proposal “represents an extremely attractive opportunity to deliver compelling value’’ to shareholders of both companies.
The merger would create a $22bn company based in Adelaide, bringing together Santos’s energy assets across the Cooper Basin, liquefied natural gas plants in Queensland and the Northern Territory, and the Narrabri coal seam gas project in NSW, among others, with Oil Search’s PNG LNG project which Santos is already a partner in.
“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.
Santos chief executive Kevin Gallagher, who earlier this year was paid a $6m retention bonus to stay with the company until 2025, would head up the merged entity.
Mr Gallagher has been instrumental in reshaping Santos since taking over in 2016, aggressively cutting costs and paying down the company’s at-the-time inflated debt.
He and the Santos board fended off a $13.5bn takeover directed at the Adelaide company in 2018 from US-based Harbour Energy, and Santos has several growth projects on foot, as well as ambitions for a carbon capture and storage project at Moomba in Far North SA and eventually potentially hydrogen generation.
Analysts are speculating Santos could come back with a higher bid, with VanEck deputy head of investments and capital markets Jamie Hannah saying it was not surprising the first offer was rejected.
“VanEck’s own opinion is that a higher bid could come from Santos. Oil Search is trading at very low levels and Santos can afford to bid more and might add a cash component to the deal,’’ Mr Hannah said.
“Santos delivered record annual production and sales volumes in 2020 generated US$302 million in free cash flow in the first quarter of 2021 alone.
“Santos’ coffers are filling up with cash given rising commodity prices. And Oil Search is well and truly down. Prior to the COVID crash of 2020, Oil Search was trading at nearly $9 and then it plummeted to just $2 and it has only recently scraped its way back to $4.’’
Santos shares were trading at $6.53, down 4.4 per cent, on Tuesday afternoon.
Oil Search’s chief executive Keiran Wulff resigned on Monday amid behavioural complaints from staff and a long-term health issue.