Santos Ltd to merge with Oil Search Ltd

Santos Ltd Overview
Santos Limited is an Australian public company specialized in the energy industry, founded in 1954. The current CEO is Kevin Gallagher. The company’s products include gas and petroleum exploration, productions of liquefied natural gas (LNG), condensate, oil, gas and ethane and liquid petroleum gas (LPG). Its supply of services are focused on Australia (as 87% of revenue) and Papa New Guinea (PNG) (as 13% of revenue). The company’s purpose is to provide long term value for shareholders sustainability, in which it will maintain a strong focus on reliability, low costs and high performance. Its vision is to become the biggest supplier of LNG in the Asia Pacific. Santos’s operations has provided new job opportunities in Australia, thanks to its partnerships with local communities and its local-based operations. Its purpose and vision are both supported from the company’s strategy: to transform, build and grow :
– The “transformation” stage includes having a more diverse portfolio of natural gas assets, a free cash flow breakeven at less than or equal to 35/bbl oil price and reduced emissions.
– The “build” stage of its strategy will involve maximizing margin with M&T business, establishing energy solutions and chasing value accretive acquisition opportunities.
– The “grow” stage of Santos’s strategy will be to strengthen the core assets via M&A opportunities, and low carbon energy solutions projects.

Oil Search Ltd Overview
Oil Search is a Papa New Guinea based petroleum company specialized in oil and gas exploration, founded in 1929. The current CEO is Richard Lee. The company’s ambition is to become the “preferred energy company” for all stakeholders, via a focus on simplified PNG operations and sustained low costs. The latter, followed by the delivery of the Pikka project with a “breakeven cost of supply below US$40/bbl along with the maximization of shareholder return and free cashflow via complementary energy investments. The company mainly operates in Papua New Guinea, followed by Australia. Its products are comprised of oil and condensate sales, gas sales, drilling and camp lease revenue, LNG sales, followed by other.

The current portfolio of Oil Search is composed of:
– An Exxon Mobil driven PNG LNG project , with 29% interest invested
– Operated oil and gas assets in PNG that produce 20% of PNG LNG gas and oil
– 51% in Alaska oil assets
– 22.8% in Papua LNG

Deal Purpose & Synergies
– Create a global top 20 oil and gas company, with the aim to meet net zero carbon targets in 2040.
– It should position Santos (Australia) as largest shareholder in the country’s biggest resource project (PNG LNG project by Exxon Mobil Corp).
– In contrast to the PNG government’s view, Santos claims merger will also create new jobs.
-Merger should unlock pre-tax synergies of USD$90 – 115million per annum. (excluding the integration and one off costs).
-Pro-forma of 116 million barrels of oil approx. (for the year 2021).
-Target gearing at less than 30%.

Deal Structure
– Valuation of Oil search at A$8 billion (US$ 6 billion)
– Merger to create an approximately US$16 billion company (AUD$2100 million)
– Oil search shareholders to receive a 38.5% stake (or 0.6275 new Santos shares for Oil Search equity holders in merged group (after approval from Papa New Guinea court)

Valuation Methodology
The valuation method used is a multiples valuation approach. The 30 companies chosen were based on the industry of “energy” with the geographical location in the Australia. The 20 companies were narrowed down into four companies based on similar market caps, sector & services.

Deal Concerns
– Papa New Guinea Government raises concerns over the deal harming national interests with job losses induced from a foreign company’s excessive ownership of domestic oil and gas.
– The delisting of Oil Search would also raise concern towards national interests.



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