Santos, Oil Search agree $21bn merger
Santos and Oil Search have signed off on their tie-up, with the deal set to catapult the combined company into a top 20 global oil and gas producer.
Santos and Oil Search signed a merger agreement, cementing a $21bn deal that will see the combined business catapult into the world’s 20 largest energy companies and arm it with a bigger balance sheet to navigate accelerating climate pressures.
As foreshadowed by The Australian’s DataRoom column, the terms of the tie-up remained unchanged from over a month ago with Santos controlling 61.5 per cent of the beefed up producer to Oil Search’s 38.5 per cent, a sweetener to the previous 63-37 per cent ratio rejected by Oil Search’s board.
The pair have been conducting mutual due diligence for the last five weeks and Santos outlined synergies of $US90m -$US115m ($121m-$155m) a year amid expectations of job losses and the potential closure of Oil Search’s Sydney office.
The combined company will be headed by current Santos chief executive Kevin Gallagher with three Oil Search directors likely to be included on the joint board.
The merger that hands the combined company $US5.5bn of liquidity has been pitched as the deal that will allow Santos to fund a move to net zero emissions, with Mr Gallagher describing climate pressures as the biggest challenge for the industry over the next decade.
But not all investors are yet convinced. Oil Search shareholder Allan Gray said it still held concerns over the company being sold on the cheap.
“I feel Oil Search shareholders are getting a worse deal than I think the relative value of the two companies would otherwise imply,” Allan Gray managing director Simon Mawhinney told The Australian.
Still, the assumption an industry giant like ExxonMobil may launch a rival bid had dissipated given the scrutiny faced from its own investors worried about its climate footprint.
“I think companies like Exxon, ConocoPhillips and TotalEnergies are less likely than they were five years ago to come in with a bid.”
The 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.
Oil Search confirmed that it intends to recommend shareholders vote in favour of the proposal which would create a top 20 listed ASX company and one of the 20 biggest oil and gas companies in the world.
“The merger represents an attractive combination of two industry leaders to create a regional champion of quality, size and scale with a unique and diversified portfolio of long-life, low-cost oil and gas assets,” Santos chairman Keith Spence said.
The tie-up would have catapulted Santos into Australia’s biggest oil and gas producer but a $40bn merger between Woodside Petroleum and BHP’s petroleum arm would see the South Australian company remain second in the pecking order.
Santos increased its bid to 0.6275 new Santos shares for each Oil Search share held from 0.589 shares under its original offer.
“Put simply, this merger provides Oil Search shareholders with a compelling opportunity to participate in a larger entity with significant scale, product mix, ESG and geographic diversity, and access to capital. The combined entity will have the capacity to deliver on an exciting pipeline of organic growth opportunities,” Oil Search chairman Rick Lee said.
Oil Search and Santos own 29 per cent and 13.5 per cent stakes in the PNG LNG project respectively while Oil Search also holds a 22.8 per cent share in Papua LNG, which will add a further two trains of LNG or 60 per cent extra capacity by 2027.
Still, it faces several hurdles including a shareholder vote and pressure from the PNG government which on Thursday demanded better terms and warned that aspects of the deal could fail a national interest test.
The government of PNG, where both producers own major gas interests, has upped the ante by saying aspects of the transaction may not pass a national interest test seen as critical for the deal to proceed.
Santos may look to engineer a equity swap deal in Papua New Guinea with French energy giant TotalEnergies and sell Oil Search‘s Alaskan oil project once the $21bn merger completes, analysts from RBC said on Friday.
The merger, recommended by Oil Search, would hand the combined company 42.5 per cent of PNG LNG and a higher stake than operator ExxonMobil at 33.2 per cent.
Rather than simply selling a 10 per cent stake in PNG LNG, Santos may look to do a swap giving Total a foothold in PNG LNG and the beefed up Santos a bigger share of Papua LNG which is operated by the French company.
“We think this may also imply an equity deal with TotalEnergie is possible in order to drive better unification between both PNG LNG and Papua LNG joint ventures,” RBC said.
Oil Search’s 51 per cent stake in the Alaskan oil project, Pikka, may ultimately be sold if the deal proceeds.
Alaska “does not fit into Santos’ strategic profile of building on its existing infrastructure hubs,” the broker said.
Pre-tax synergies of $US90-115m a year may be conservative given Santos‘ strong track record from other deals.
“Santos has a good track record in extracting merger synergies and we therefore assume synergy savings will grow further from the addition of PNG cost efficiencies and removal of duplicated activities. We also assume these synergy savings do not include Alaska,” RBC said.
Santos rose 0.5 per cent to $6.06 while Oil Search lifted 2.2 per cent to $3.73.
