Santos, Oil Search Merger Plan Advances

Copyright © 2021 Energy Intelligence Group

Santos and Oil Search have concluded a definitive merger agreement that will create a middleweight international oil and gas producer, with stakes in four LNG projects in Australia and Papua New Guinea.

The two companies expect to complete the transaction by the end of this year, subject to regulatory and shareholder approvals.

The government of Papua New Guinea (PNG) has sent mixed messages about the deal in recent days, with Prime Minister James Marape reiterating that the country will consider whether it is in the country's national interest.

Oil Search's board had already said it expected to advise its shareholders to accept a revised all-stock offer for the company from Santos after rejecting an earlier offer.

Assuming it goes ahead, the transaction will create a company with a market capitalization of around A$21 billion (US$15 billion) and pro-forma combined production this year of around 320,000 barrels of oil equivalent per day.

Santos shareholders will own around 61.5% of the combined company and Oil Search shareholders will own about 38.5%.

Santos said it expects the merger to unlock pre-tax synergies of US$90 million-US$115 million per year.

PNG Officials Have Their Say

The merger is subject to various approvals in Papua New Guinea and court hearings are expected in late October and early November.

An independent expert will also be appointed to evaluate whether the merger is in the best interests of Oil Search shareholders, who will vote on it in late November.

Marape recently reiterated that the merger "must pass the national interest test" but he has also spoken about it in positive terms .

Petroleum Minister Kerenga Kua said "there is nothing we can do about the merger because it is a free market and normal business taking its course."

However, Kua said he had been asked to take a close look at the deal because issues off national interest are at stake.

Deputy Prime Minister Samuel Basil said that if the merger -- among other things -- undermined the interests of domestic shareholders, led to job losses or delisting from the local stock exchange, it would not be in the national interest.

Possible Peace Offering

Energy Intelligence understands that Marape has dismissed suggestions made by some local politicians that state-owned Kumul Petroleum should acquire some of the Oil Search assets.

"Marape is more likely to ask for a local listing and local content requirements," a source said.

Oil Search is currently listed on Papua New Guinea's PNGX stock exchange, while Santos is listed on Australia's ASX exchange.

Some observers say Santos may be willing to sell some of its shares in the producing PNG LNG project (operated by Exxon Mobil) and the proposed Papua LNG project (operated by TotalEnergies) to ensure the merger is approved.

"Santos may be willing to take a minor haircut to the PNG portfolio to appease the government, but major cosmetic surgery seems out of the question," Rystad Energy analyst Readul Islam told Energy Intelligence.

Oil Search has oil assets in Alaska -- where it is looking to sell down its ownership stake -- as well as gas and LNG assets in Papua New Guinea.

"Santos undoubtedly values the PNG gas more, which adds to its LNG stash, but also aligns with its net-zero goals," Islam said.

If the merger proceeds without major modifications, Santos would see its stake in PNG LNG rise from 13.5% to 42.5%, which would exceed operator Exxon's 33.2% interest.

Santos would also acquire Oil Search’s 17.7% stake in the still unsanctioned Papua LNG project.

The Australian company also has operated stakes in the Darwin LNG and Gladstone LNG projects in its home country.

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