Santos returns to profit as $21bn merger talks with Oil Search progress
Santos says its $21bn merger talks with Oil Search are progressing well as the energy group returns to profit amid record production.
Santos’s proposed $21bn merger with Oil Search is a case of “one plus one equals three”, managing director Kevin Gallagher says, with synergies stretching well beyond obvious cost measures.
And in the context of the just-announced tie-up between Woodside Petroleum with BHP’s global petroleum assets, Mr Gallagher also said that energy companies needed to build scale if they were to survive the coming decarbonisation of the economy, with large investments needed to be a part of the energy transition.
While announcing a $US643m ($882m) turnaround in Santos’s first half profit to $US354m in the black, on record sales volumes and production, Mr Gallagher said the merger team which had already successfully bedded down the Quadrant Energy and ConnocoPhillips deals was well-versed in identifying opportunities.
“I think I’ve got a management team that look for the value-add opportunities under very rock and so far they’ve proven themselves very capable in that space,’’ he said.
“But with the merger I always come back to — we’re not doing it just for the synergies, we’re doing it because of the strategic rationale, the strategic fit of the two organisations in my view just makes sense.
“This is one of those occasions when you take that strategic fit, you take the significant synergies that we believe will be possible from this merger and it’s very much a case of one plus one equals three. So that’s good for all investors.’’
Mr Gallagher said that while removing duplication in staff was an obvious benefit of any merger, the company had found through previous deals that there were scale benefits around being able to centralise engineering, in procurement, and other areas which multiplied the synergies.
“If you think most oil and gas companies have one or two assets to operate, we’ve got seven assets we operate around Australia and … we’ve been able to realise very significant scale synergies and benefits from that,’’ he said.
And companies would need to be big to survive.
“I think it’s becoming increasingly important for a number of reasons, not just because of those sort of benefits (of scale and synergies),’’ Mr Gallagher said.
“Those are very important, but also because you’ve got to be able to fund your growth activities, and the energy transition itself will be very expensive, it’s going to be very capital-intensive.
“And so, while you’re going through that energy transition, companies that are small and on their own and maybe don’t have a great ESG pathway will struggle to raise capital.
“If you don’t have the balance sheet or the ESG credentials, capital will either be unavailable to you or it will be expensive capital which will mean that transition is slower.
“It’s a vicious cycle.’’
On the other hand, bringing companies together and gaining the strength that came from size and scale, including strong cashflow to fund projects, meant that there was scope to invest in transition projects like carbon capture and storage (CCS) or clean fuels “and very importantly still pay very strong dividends to your shareholders’’.
On the status of the Oil Search deal, Mr Gallagher said he was “pleased with the progress we are making on due diligence and look forward to the signing of a binding merger implementation deed in the coming weeks’’.
The deal will see Oil Search shareholders own 38.5 per cent of the merged company with Santos the 61.5 per cent balance.
On CCS, the company’s $US165m Moomba project was on track for a final investment decision before the end of the year, Mr Gallagher said, and with government sign off on Australian Carbon Credit Unit rules expected soon, it was Santos’s belief “that these projects will become very valuable … and we’ll see a lot more of them’’.
“There’s nothing I can think of that’s going to have a more profound impact on reducing emissions across Australia, and the double whammy of protecting jobs, than carbon capture and storage,’’ he said.
“We have a lot of large, depleted reservoirs around the nation that we’ve been taking stuff out of for decades, and that can be used to safely and permanently store CO2.
“I just think as people see what we’re doing and that it’s working, there will be more of those projects.
“The Moomba project becomes a great example of South Australia and even Australia leading the technology race and becoming global leaders in this space very quickly.’’
The fact that they stacked up financially was key to the adoption, and that moment was about to arrive, he said.
“We’re not doing this to greenwash, we’re doing it because we think it’s good business to do it. Ultimately off of our CCS projects we will develop a green fuels business”.
Mr Gallagher said ESG concerns “dominate most of our investor meetings now” and investors wanted to know from companies that they were investing in the right areas and “that you’re serious about your plan’’.
“As far as we’re concerned we think we’re getting a lot of benefits from that story because we’re not investing in studies. we’re investing in real projects.’’
The company is also planning CCS projects at Bayu Undan and offshore Western Australia.
Santos net profit of $US354m for the six months to June was up from a $US289m loss last year, which was hurt by writedowns due to changes in oil price assumptions.
Santos’s underlying profit jumped by 50 per cent to $US317m on record sales volumes of almost 54 million barrels of oil equivalent.
Sales revenue rose 22 per cent to $US2.04bn from $1.67bn.
Santos will pay a fully franked interim dividend of US5.5c a share, more than double the US2.1c last year.
It closed down 0.8 per cent at $6.16 on Tuesday, against a 0.9 per cent fall in the benchmark index.
