Santos is closer to realising the value of its overlooked strategic LNG assets after renewed takeover speculation linked to Middle Eastern money underlined the oil and gas producer’s status as a potential target in the wave of global energy consolidation.
As Australian superannuation funds distance themselves from fossil fuel investments, sovereign-backed Saudi Aramco and Abu Dhabi National Oil Co (Adnoc) emerged as possible suitors for the $25 billion Santos, which failed to strike a merger with Woodside Energy earlier this year.
Investors and analysts played down the likelihood of a firm offer emerging from either foreign group, originally reported by Bloomberg, but the news rekindled investors’ conviction that Santos is worth more than the $8 a share it closed at on Thursday.
The oil and gas producer is engaged in talks with third parties on potential asset sales in Western Australia and Alaska. Santos is also understood to be negotiating with potential customers both for LNG sales and its carbon capture and storage projects, an area where it aligned with Adnoc last year.
Analysts including MST Marquee’s Saul Kavonic are not ruling out the possibility of a foreign takeover of the Adelaide-based producer, five months after the mooted $80 billion merger with larger rival Woodside collapsed.
That deal would have brought Santos to the attention of a wide group of potential bidders, but none of that attention has resulted in an offer, industry sources note. At the same time, Santos chief executive Kevin Gallagher and the company’s advisers have been working to consider alternative options, including a corporate restructure, although the option of a spin-off of LNG has been shelved as unworkable.
Investors said on Thursday they were keen to find a resolution to Santos’ underperformance.
“There is pressure on any company’s management where the value of their assets is not reflected in their share price, and I think Santos falls very squarely in that category,” said Romano Sala Tenna at Katana Asset Management, which holds the stock.
Mr Kavonic cited European majors, EIG-owned MidOcean Energy or ConocoPhillips as other possible suitors, but noted they all face hurdles either on the grounds of value, funding or alternative priorities.
“It’s a real stretch to think Aramco or Adnoc would actually bid for Santos,” Mr Kavonic said. “The most interesting aspect of this is if it might signal there are more advanced discussions under way with another bidder, and this has been leaked to add impetus to those discussions.”
EIG, the US-based private equity group which partnered Brookfield for a failed $20 billion takeover of Origin Energy last year, has already looked closely at Santos, making an unsuccessful $14.4 billion approach for the company in 2018. It finally secured a foothold in Australia’s gas sector earlier this year, buying minority stakes in three LNG projects from Tokyo Gas, but is expected to seek a bigger presence.
Matt Haupt at Wilson Asset Management described a bid from either of the two Middle Eastern parties as “unlikely”, but made it clear he would be open to considering an offer.
“Santos is an attractive target, and we welcome any approaches to unlock value,” Mr Haupt said.
A Santos spokeswoman said the company “does not comment on market speculation”.
Allan Gray portfolio manager Simon Mawhinney regarded both Santos and Woodside as “reasonably cheap” and urged them to consider buying back their shares.
“Both companies have meaningfully underperformed their overseas peers, and meaningfully underperformed the biggest underlying driver of their earnings which is oil prices, and both companies have been making very good free cash flow,” he said.
“These companies – Santos and Woodside – should just buy back their shares. That is what we would like to see.”
Investors frustrated
Mr Kavonic agreed investors were “frustrated” and keen for a shake-up at the company.
“There is no succession plan in place for the CEO who is coming towards the end of his tenure,” he said. “Santos’ LNG assets, especially in Papua New Guinea, are prized and would attract ample interest. But Santos also comes with lots of lower-tier assets and legacy liabilities that deter many potential acquirers.”
Mr Sala Tenna also pointed to regulatory hurdles that stood in the way of a deal with Aramco or Adnoc: “The regulatory hurdles in Australia are so pronounced that it would have to be a very convoluted and complex deal to provide the safeguards I think the Australian government would need, especially with domestic gas,” he said.
“What would make sense is if they were to quarantine the domestic gas assets … perhaps spin them off into a domestic vehicle in another party’s hands, and then there’s the potential there [for a deal]. But again, it would be a fairly drawn-out, complex process.”
Raaz Bhuyan at WaveStone Capital said that anyone who believed that gas has a future as a transition fuel would likely find Santos appealing, given its LNG portfolio.
“Strategically, most of the demand growth coming out of Asia and North Asia in particular, and these guys [Santos] – from a geographical kind of context – have probably got the best position to benefit from that,” he said.
Shares in Santos were up 4.2 per cent at the close, their highest for nine months.
The speculation comes as Santos is considering selling down its interests in two key assets to bring in other investors. Those comprise the Dorado oil and gas field in Western Australia and the Pikka oil project under construction in Alaska.
However, the option of a spin-off of Santos’ LNG interests, as suggested by some investors, is understood to have been examined but considered unworkable given the dominance of LNG in the broader portfolio. On some reckoning, only the West Australian gas assets are not tied to LNG interests, whether in Queensland, the Northern Territory, or Papua New Guinea.
Santos has refocused on delivering key growth projects – notably its carbon capture and storage project due online this year at Moomba in South Australia, its controversial $5.8 billion Barossa gas project in the Timor Sea that will supply more fuel for Darwin LNG starting in 2025, and the Pikka venture due online in 2026.
The $15 billion Papua LNG venture has been further delayed, with a final investment decision now only targeted in 2026.
A slower rollout of its expansionary agenda was the driver for Santos’ decision in April to slash 200 jobs. The company is still in the middle of a period of heavy capital expenditure due to the development of new oil and gas fields, which has also drawn significant criticism from environmental organisations and some activist shareholder groups.
With Joanne Tran
