Leading natgas and LNG supplier evaluates options after merger talks fail

Natural gas supplier Santos is evaluating structural options as it looks to unlock value for shareholders after its merger negotiations with fellow Australian LNG producer, Woodside Energy, failed.

The two firms brought three months of talks to an end last month. Analysts suggest three options are now likely being assessed — a separation of Santos’s LNG assets from the firm’s other divisions, further assets sales, or another merger with an LNG portfolio player.

Over the last three years, Santos’s total share of cash returned to shareholders have been among the lowest of other global gas exporters, based on Evaluate Energy data.

Shares fell to A$7.17 (US$4.74) this week* from a three-year high of A$8.53 (US$5.60) in June 2022. Santos said at its 2023 investor day that it had appointed advisers to assess a range of options, acknowledging its “disappointing” share price performance.

“We will continue to look at other opportunities to unlock or create shareholder value whilst keeping our organization focused on delivering on our strategic plan,” CEO Kevin Gallagher said on the recent full year results call.

A demerging of Santos’s LNG assets in Australia and Papua New Guinea from its Australian and Alaskan oil and gas assets was proposed by activist shareholder L1 Capital last year.

“We believe a structural separation of the company’s LNG assets would help to unlock the inherent value of Santos’s assets and ultimately present a significant value-creating outcome for shareholders,” said a quarterly report from L1 Capital.

Such a move could highlight the firm’s LNG equity assets to investors. These assets are well placed to serve markets in China, South Asia and South-east Asia that will see natural gas demand grow from under 700 BCM currently to over 1050 BCM by 2040, according to Shell’s latest LNG outlook.

L1 Capital’s analysis suggested the valuation of the two demerged divisions would be equivalent to over A$10.50 (US$6.50) per share, representing an uplift of 43% from the share price of A$7.35 (US$4.80) in September last year.

Asked about any potential demerger at the firm’s full year results call, CEO Gallagher would not comment on the merits of the proposal but reiterated that the firm would “evaluate all options.”

A second option could be for Santos to divest more of its assets.

• The firm sold a 2.6% stake in the PNG LNG project to Papua New Guinea’s state-owned firm, Kumul, in September last year, with a call option for a further 2.4% that can be exercised before June.
• In the same month, the firm divested half of its working interest in 148 Alaskan exploration leases to Apache Corp. and Armstrong Oil & Gas.

A third option is another merger with an oil and gas player.

*March 13, 2024 Closing Price. Source: Australian Stock Exchange