AsianOil: Santos, Oil Search merger to create new upstream powerhouse

Australia-listed independents Santos and Oil Search’s proposed merger, first revealed last month, is back on track after Santos compromised over ownership stakes.
The two sides said on August 2 that Oil Search had agreed to Santos’ revised proposal, which would see the former take a 38.5% interest in what is set to become not just Australia’s largest oil and gas producer but also one of the world’s top 20 producers.
Santos estimated the new company would have a combined output of 116mn barrels of oil equivalent this year, while boasting 4.98bn boe of 2P+2C resources and enjoying more than $5.5bn of liquidity to self-fund projects.
The deal improves on Santos’ original offer on June 25 that would have seen Oil Search’s shareholders receive a 37% interest in the combined offer. Oil Search’s board rejected that proposal, saying at the time that it failed to reflect fair value for its shareholders.
Oil Search said this week, however, that its board intended unanimously to recommend the revised merger proposal, barring a superior proposal and subject to an independent expert concluding that the deal was in its shareholders’ best interests.
The revised proposal implies a transaction price of AUD4.29 ($2.96) per Oil Search share, based on both companies’ closing price on July 19. This new offer also represents a 16.8% premium to Oil Search’s closing price on the same day, addressing the smaller company’s original complaint that Santos’ first offer only represented a 6.8% premium on its July 16 closing share price.
The deal, which is still subject to regulatory approval, will create an oil and gas giant with a market capitalisation of AUD21bn ($15.53bn), positioning it in among the ASX’s top-20 companies.
Santos highlighted its track record of integration, pointing to the recent acquisition of Quadrant Energy and ConocoPhillips’ Western Australian WA and Northern Territory business, which it said had delivered more than $160mn in annual synergies.
However, Credit Suisse has argued that Santos likely overpaid in order to push the deal over the line, warning that significant cost cuts must be implemented to justify the new terms.
“We struggle to see how Santos can capture synergies to justify the approximately 17% premium to Oil Search shareholders, let alone much more to provide upside room left to Santos shareholders. Over $160mn per annum in cost savings would be required to justify the premium,” The Sydney Morning Herald quoted him as saying.