The assets need to add up to support the case for a merger between Santos and Woodside

Does a merger between Woodside and Santos add up to a better company, or just a bigger one? Nick Evans works through the possibilities.

Santos’ Moomba gas plant in South Australia’s far north. Picture Simon Cross

The desire to simply get bigger no longer cuts it as a reason for major takeovers and mergers. For deal-makers at Santos and Woodside the question is whether one plus one can be made to equal three.

BHP didn’t buy OZ Minerals to add more copper output. It paid $9.6bn for a basin-scale position in South Australia that would eventually produce more copper, for less money, than either company could manage alone.

Newmont didn’t buy more gold production through Newcrest – it got access to top-tier copper and gold development projects and expertise in mining methods lacking elsewhere in its portfolio.

On the face of it, the prospects look pretty good for synergies between Woodside and Santos.

Santos’s position in PNG is the envy of most of the global oil and gas heavyweights. Added to Woodside’s existing production, it immediately makes up for the growth lacking elsewhere in the company’s portfolio.

Woodside’s strong presence in the US after its takeover of BHP’s petroleum division could help guide the development of Santos’s Alaskan projects and, while Santos and Woodside both have plenty of complexities in their respective fields north of Darwin, there could be a few synergies under the hood of Barossa and the Greater Sunrise project in a merged company. Simple matters like the single booking of vessels that could work back-to-back across the region could deliver real savings, even before thorny issues such as infrastructure are considered.

Even Santos’s ageing Cooper Basin assets wouldn’t necessarily weigh down a deal, industry sources say, despite analyst commentary to the contrary.

On their own both would be difficult to sell – the federal government’s intervention when Exxon flagged a plan to sell its half of Bass Strait is likely to be applied to Woodside, and even to Santos in the Cooper Basin.

But establish a strong team that specialises in managing declining assets – and preparing for their eventual decommissioning – and plenty of cash could still be milked from both as they wind down, assuming any ACCC concerns could be addressed.

Santos’s only real albatross is its Gladstone LNG assets, which lack the gas supply to justify the multiple production trains built at the height of Queensland’s coal-seam gas hype. Former Woodside boss Don Voelte famously once nominated his decision to keep the company out of Queensland as the best of his term as the company’s chief executive – and the sale or spin-out of Santos’s 30 per cent GLNG stake could well be the most obvious carve-out in any merger of the two companies.

Leaving aside the likely benefits, merger talks have clearly come about because of Santos’s recent vulnerability, despite the blockbuster merger with Oil Search only two years ago that was supposed to secure its long-term future. Other oil and gas majors have been bulking up – most recently through ExxonMobil’s $US60bn acquisition of Pioneer, and Chevron’s $US53bn buyout of Hess.

But some of Santos’s problems are self-inflicted. Much has been made of the $6m golden handcuff offered to Kevin Gallagher by the Santos board in 2021, pitched at the time as a move to keep Gallagher from taking the top job at Woodside.

Santos chief Kevin Gallagher has stepped back from his role in order to look after a sick family member. Picture: AAP

As it turns out the “growth ­projects” incentive was not needed as he wasn’t really in the running – the point on which most commentary has focused. In retrospect the board’s decision looks even worse than just a waste of money. It effectively told Santos employees – and its external enemies – that there would be no change at the company for another four years.

No change to problems in the company’s culture, no change to its pugnacious approach to external stakeholders, and no likelihood of CEO transition – and thus no reason to compete for the top job among the next rank of executives.

That is almost certainly a factor that helped Kerry Stokes-backed Beach Energy poach Brett Woods – seen as the only real heir apparent to Gallagher at Santos. It has also made Santos predictable to its legion of enemies – in the environmental movement, traditional owner groups, and within government.

Even Australia’s major gas buyers would almost certainly prefer to deal with Woodside than Santos in the domestic marketplace. Remember also that Gallagher stepped back from his daily duties in late September to help care for a sick family member. Taken together, there is now a real sense that Santos is drifting rudderless – easy pickings if Woodside wants to make a play.

And lastly, never forget the role of ego in corporate Australia. Richard Goyder’s reputation has taken a beating this year, primarily as a result of his role at Qantas – where he presided over a botched CEO transition. But there are few with a better track record in deal making in corporate Australia, both as a chairman and as an executive at Wesfarmers. What better way to recover from a horror year than start the next with an $80bn blockbuster merger as the chairman of Woodside?

Originally published as The assets need to add up to support the case for a merger between Santos and Woodside