Oil Search has agreed to a sweetened takeover deal by rival Santos, less than 2 weeks after shunning a lower-valued proposal. Under the improved $6.2 billion, all-share offer, Santos will give Oil Search shareholders 0.6275 new Santos shares for each Oil Search share. The revised offer is a 6% increase over the original 0.589 new Santos shares offered in July. Under the refreshed offer, Oil Search shareholders will own 38.5% of the merged company to Santos’ 61.5%.
The deal combines Australia’s second- and third-largest oil and gas companies into a $16-billion powerhouse with assets ranging from Oil Search’s operating assets in Papua New Guinea (PNG) 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. The merged company will have a combined 2021 production of about 116 million BOE.
Santos Managing Director and Chief Executive Kevin Gallagher said the merger of Santos and Oil Search is consistent with Santos’ disciplined strategy to grow around its core assets.
“It represents a compelling combination of two industry leaders to create an unrivaled regional champion of size and scale with a unique diversified portfolio of long-life, low-cost oil and gas assets,” he said. “The merged company would have strong cash generation from a diverse range of assets which provides a strong platform for sustainable growth and continued shareholder returns.”
The Santos-Oil Search deal follows other consolidation efforts within the exploration and production sector including Chevron’s purchase of Noble Energy in 2020 and ConocoPhillips’ finalizing the acquisition of shale-focused Concho Resourcesearlier this year. Pundits believe there may be more mergers in the offing as smaller companies look to shed costs and major oil companies look to realign operations toward less carbon-intensive activities.
“We’ve been expecting to see more consolidation among international E&Ps, following the lead of the US independents that have sought strength and resilience in scale,” said Wood Mackenzie Research Director Andrew Harwood 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.”
The board of Oil Search has confirmed that it intends to unanimously recommend the revised merger proposal, in the absence of a superior proposal and subject to an independent expert concluding that the deal is in the best interests of Oil Search shareholders.
“At current commodity prices, the combined entity will generate significant free cash flow through 2021 and 2022,” added Harwood. “A stronger balance sheet will then provide a solid platform from which to invest in new development projects in Australia and PNG.”
