Santos offers better deal to Oil Search in push to create top 20 global oil firm

Following the recent rejection of a merger proposal, Australia’s energy giant Santos has improved its offer for its merger with The Papua New Guinea-focused oil, gas, and LNG producer Oil Search. The deal would create a new entity positioned in the top-20 ASX-listed companies and the 20 largest global oil and gas companies.

As reported in July 2021, Santos first approached Oil Search about a possible merger in June with an offer of 0.589 of its shares in exchange for each Oil Search share on issue. In case of a deal, Santos shareholders would have owned 63 per cent of the combined company and Oil Search investors the remaining 37 per cent.

However, Oil Search rejected the bid on the grounds of the proposal not having offered appropriate value for its shareholders.

In an update on Monday, Santos said it had reached an agreement with Oil Search on the merger ratio under the proposed merger.

Under the revised merger proposal, Oil Search shareholders will receive 0.6275 new Santos shares for each Oil Search share held via a scheme of arrangement. Following the approval of the scheme, Oil Search shareholders will own approximately 38.5 per cent of the merged group and Santos shareholders will own approximately 61.5 per cent.

The board of Oil Search has confirmed that, subject to the completion of confirmatory due diligence and the agreement of a binding merger implementation agreement, their intention is to unanimously recommend the revised merger proposal, in the absence of a superior proposal and subject to an independent expert concluding that the scheme of arrangement is in the best interests of Oil Search shareholders.

The proposal implies a transaction price of A$4.29 per Oil Search share, based on the closing price of Santos and Oil Search shares on 19 July 2021. This represents a 16.8 per cent premium to the Oil Search closing price on 19 July and a 16.4 per cent premium to the one-month VWAP on that day. In addition, the proposal represents the opportunity to deliver compelling value accretion to both sets of shareholders.

The merger of Santos and Oil Search would create a regional champion of size and scale with a diversified portfolio of high quality, long-life, low-cost assets across Australia, Timor-Leste, Papua New Guinea, and North America with significant growth optionality, Santos said.

It would create a player with a pro-forma market capitalisation of A$21 billion ($about $15,5 billion), which would position the merged entity in the top-20 ASX-listed companies and the 20 largest global oil and gas companies.

The new entity would have a combined 2021 production of approximately 116 million barrels of oil equivalent and a combined 2P+2C resource base of 4,983 million barrels of oil equivalent.

The new entity would also have substantial potential combination synergies. Santos has an excellent track record of integration and recently merged Quadrant Energy and ConocoPhillips’ WA and NT business unit into Santos, delivering more than US$160 million in annual synergies.

Santos pointed out that Oil Search shareholders would continue to participate in the merged entity and retain the opportunity to realise a premium for control as part of the merged entity.

Santos Managing Director and Chief Executive Officer, Kevin Gallagher, said about the potential merger: “It represents a compelling combination of two industry leaders to create an unrivalled regional champion of size and scale with a unique diversified portfolio of long-life, low-cost oil and gas assets”.

He added: “The revised merger proposal represents an extremely attractive opportunity to deliver compelling value accretion to both Santos and Oil Search shareholders”.

Santos and Oil Search will now conduct due diligence subject to appropriate confidentiality arrangements over a period of approximately four weeks with the aim of entering into a merger implementation agreement, which would contain conditions to completion of the merger such as regulatory approvals.