Woodside, Santos merger talks linked to shareholder frustrations

Energy giant Santos has struggled to bolster its share price amid rising shareholder frustration, which led to quiet review and a possible $80bn merger.

Woodside explored the prospect of a merger with Santos after the South Australia-based company moved to quietly implement a strategic review amid rising shareholder frustration over its share price that has struggled despite a global energy crunch.

Santos confirmed late on Thursday it was in preliminary talks with the much larger Woodside over a merger that investors have greeted.

Earlier this year, a group of investors wrote to Santos to suggest the company split the business, creating a separate LNG entity that the shareholders said would drive the share price up more than 40 per cent.

Santos confirmed receipt of the proposal, but never revealed its view on the plan.
However, The Australian understands that Santos quietly engaged Citigroup to undertake a strategic review of options, including the proposal mooted by the group of investors.

The plan pitched by Melbourne-based fund manager L1 Capital, with the support of Tribeca Investment Partners and Wilson Asset Management, was then discussed with the market, but it received a cool reception.

This in combination with the broader share price frustration is understood to be the catalyst for Woodside interest.

The Australian understands Woodside has appointed Morgan Stanley as advisors on the possible transaction.

Talks with Woodside are understood to be at a very early stage, but a transaction could be attractive as chief executive Kevin Gallagher approaches the end of his much-publicised contract. But sources close to Santos said the company will not accept any deal that does not unlock shareholder value.

“Have you seen the share price? Kevin is not shy in talking internally about 2025 and his own situation, but he is focused on shareholder value and any talk of a nil premium is not delivering for shareholders” said one source.

Shares in Santos are nearly 6 per cent higher in Friday afternoon trade at $7.23.

The talks come as Santos struggles with a series of problems.

Work on its $5.2bn Barossa LNG project has been curtailed by two legal challenges, which the company has warned threatens its production timetable.

Santos insists those problems are not unique to it, and sources also highlight several legal challenges faced by Woodside.

Woodside’s chief executive Meg O’Neill has warned she expected further opposition as its own $16.5bn Scarborough project materialises.

Santos in 2021 handed Mr Gallagher an unusual $6m “once-off growth projects incentive” in 2021 to deliver the oil and gas giant’s major projects to 2025 – a move that proved successful in keeping him out of winning Woodside’s top job, now held by Meg O’Neill.

Investors in Santos said they continued to believe in the outlook for the company and would therefore be hesitant to accept a merger with Woodside without a significant premium.

“We need some meat on the bone. We did not invest in Santos for one quarter, and of course we are frustrated with the share price – but eventually the value will be unlocked – and we wouldn’t accept losing that upside without a decent premium on the offer,” said one large investor who spoke on condition of anonymity.

While talks are tentative, a deal would underscore Woodside’s ambition to take a global leader position.

Woodside has moved aggressively to expand its reach, an ambition that was propelled through its acquisition of BHP’s petroleum assets.

Woodside, under Ms O’Neill, has positioned itself to capitalise on strong near-term demand for fossil fuels, while the company envisages demand for LNG to remain robust until 2050 as traditional sources of energy run low and new sources take longer to mature.

But a Woodside-Santos merger would not be entirely smooth. Some investors question the WA oil and gas giant’s interest in some assets owned by Santos.

Santos holds quality assets in PNG. But its WA assets service the domestic market, and doubt remains over whether the company’s massive investment in coal seam gas in Queensland was worth the money spent.

It’s thought that merger talks could involve a break-up of Santos with the GLNG gas export project in Queensland potentially being snapped up by Gina Rinehart’s Senex Energy, while fellow Adelaide producer Beach Energy could snap up Santos’ Cooper Basin and West Australian assets.

Woodside – already under fire from climate activists – would also inherit some of Australia’s most contentious fossil fuel projects in any merger with Santos, including the company’s long stalled Barossa gas project and Santos’ $3.5bn Narrabri gas project- which has also been beset by delays and challenges.

Originally published as Woodside, Santos merger talks linked to shareholder frustrations