Santos is ‘buoyed’ by feedback from shareholders around Oil Search merger
Santos managing director Kevin Gallagher laid out his pitch to Papua New Guinea-based stakeholders in the planned merger with Oil Search, which goes to a vote next week.
Santos managing director Kevin Gallagher says the company has been “buoyed by the feedback” it is getting from shareholders of both companies around its proposed $21bn merger with Oil Search, just days out from a crucial shareholder vote.
Oil Search shareholders will be asked to vote on the tie up with Santos at a meeting on Tuesday, December 7, with the deal needing the approval of 75 per cent of shareholders to get over the line.
Some shareholders are still unconvinced by the merits of the deal, with Allan Gray, which owns nearly 5 per cent of Oil Search, indicating recently it had voted its shares against the merger.
On the other side of the ledger, JP Morgan, in a note to clients, said it saw “significant downside risk” for Oil Search shareholders should the vote fail.
Mr Gallagher told the PNG Chamber of Mines and Petroleum Conference on Thursday that “everything remains on track for the deal to be completed by the end of this year”, which would be an “incredible achievement” given the tight timelines involved.
“The scheme is due to go to a vote of Oil Search shareholders on Tuesday of next week and then depending on the outcome of the vote, for a second Court hearing in PNG on Thursday 9th of December,’’ Mr Gallagher said.
“While there are still a number of things to fall into place over the next week and a half, I’m buoyed by the feedback that we are receiving from both sets of shareholders and the engagement we have had with the PNG government.
“If the Oil Search merger is successful, it will be the third major transaction we have completed over the past three years.’’
Mr Gallagher said Santos intended to create a secondary listing in PNG following the deal going through, which would allow the more than 4000 local shareholders to trade their shares.
The company has also committed to no planned job losses in PNG as a result of the merger, and there will be a place for a PNG national on the Santos board.
The possibility of expanding Santos’s carbon solutions, such as carbon capture and storage, in PNG would also be assessed, Mr Gallagher said.
“Our carbon solutions business will seek opportunities to work with the Papua New Guinea government and regional stakeholders to identify and develop carbon abatement projects in Papua New Guinea as well as pursue future clean fuels opportunities such as hydrogen or ammonia,’’ he said.
“For our industry, size, scale and strong free cash flow generation will be critical through the energy transition and the continued development of resources, particularly in PNG.
“The merger will position us for success in the new era of cleaner energy and clean fuels.’’
Under the merger proposal, Oil Search shareholders will receive 0.6275 Santos shares for each Oil Search share, giving them 38.5 per cent of the company post-merger.
An independent expert’s report by Grant Samuel released earlier this month gave the merger lukewarm support, saying shareholders in Oil Search faced a material loss of value under the financial terms of the merger, but ultimately concluded a deal was still in their best interests given bigger funding and development hurdles coming down the line.
“The dilution of underlying value implied by the merger terms is material,’’ Grant Samuel said.
“There is clearly a risk that the funding and other strategic benefits do not fully compensate shareholders for this dilution.”
But Grant Samuel ultimately concluded that the merger was still in Oil Search’s interests given the ability of a combined balance sheet to fund the Pikka oil project in Alaska, its belief that estimates of underlying value were “inherently uncertain” in the current environment and “real challenges” in funding growth opportunities on a stand-alone basis.
An earlier proposal for a 63-37 split was rejected by the Oil Search board.
JP Morgan said it could not see Santos sweetening the offer from its current level, and Oil Search’s management and board would be left in an “untenable position” should the deal not proceed.
“Ultimately we believe the transaction is likely to proceed, and with Santos below our net present value we remain overweight on both stocks,’’ JP Morgan said.
Separately, the Australia Institute will on Friday release a report entitled Santos’ CCS Scam, which asserts that the company’s Moomba carbon capture and storage (CCS) project should not have been registered as eligible for funding from the federal government’s emissions reduction fund.
The think tank says Santos will be injecting carbon dioxide into depleted reservoirs in a bid to extract more oil, which is specifically excluded under the fund’s eligiblity requirements.
Santos on Thursday flatly rejected this notion, saying to assert as such was “deceptive and misleading’’.
“The Moomba project is a CCS project and not a CCUS (carbon capture, use, and storage) project as has been made clear on countless occasions,’’ a company spokeswoman said.
Santos shares were 1.6 per cent lower at $6.21 at midday on Thursday while Oil Search was 0.8 per cent lower at $3.83.