Australia’s second- and third-biggest oil and gas companies are set to merge to become one of the largest in the region and in the top 20 globally.
Oil Search Ltd. on Monday said it agreed to an improved all-share offer from Santos Ltd. that would give its equity holders 0.6275 new Santos shares for each one held, giving them about 38.5% of the merged group. The combined entity would have a market capitalization of about $16 billion, vying with Woodside Petroleum Ltd. to be Australia’s biggest independent liquefied natural gas producer.
The move follows a wave of tie-ups among exploration and production companies in the U.S. shale patch, as smaller producers seek to cut costs while majors look to exit carbon-intensive operations. It may not be the last deal in Australia this year, with Woodside said to be eyeing BHP Group’s petroleum business in the nation, according to Wood Mackenzie Research Director Andrew Harwood.
“We’ve been expecting to see more consolidation among international E&Ps, following the lead of the U.S. independents that have sought strength and resilience in scale,” he said in a statement. “The Santos-Oil Search merger follows the consolidation template, bringing together two firms with overlapping interests, building scale in a strategic resource theme, LNG in this case, and on terms that provide additional value upside potential for both sets of shareholders.”
Monday’s announcement comes less than two weeks after Oil Search rejected an earlier proposal that offered 0.589 shares in Santos. The non-binding, indicative offer “presents Oil Search shareholders with an opportunity to maintain ongoing exposure to Oil Search’s portfolio of world-class assets as part of a merged group for which there is strategic logic,” the Sydney-based company said in a statement.
The merger would combine Oil Search’s operating assets in Papua New Guinea with Santos’s gas portfolio in Australia, which includes the Gladstone LNG export facility in Queensland and the Darwin LNG plant in the Northern Territory. Santos also has a stake in the Exxon-operated PNG LNG project. Together, the companies sold 135 million barrels of oil and gas in 2020, almost half of which was LNG.
Combining the two would improve the alignment of growth projects in PNG, Santos said in a statement. Oil Search is a junior partner in the TotalEnergies SE-operated Papua LNG project, which is targeting first production in the latter half of the decade and plans to use processing infrastructure at Exxon’s PNG LNG plant.
The pair’s diverse portfolio of core assets would help reduce exposure to operational risks and provide a strong platform for sustainable growth, Santos said, adding that the scale of the merged group would open it up to a wider pool of investors. The agreement is subject to conditions including regulatory approval.
The all-share deal would give Oil Search shareholders exposure to synergies created by the combined group, according to John Ayoub, portfolio manager at Wilson Asset Management International Pty, which owns shares in both companies.
“Santos has a wonderful track record of over-delivering on synergies,” he said by telephone, citing the value extracted from Santos’ $2.15 billion purchase of Quadrant Energy in 2018.