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Santos to press on with Oil Search merger bid

Business

Santos will push ahead on a merger bid to gain a greater presence in Papua New Guinea and create a $21 billion company with Oil Search, despite an initial rejection.

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The South Australian-based Santos revealed to the Australian Securities Exchange yesterday it put a confidential merger proposal to Sydney-based Oil Search on June 25 to create a “regional champion of size and scale and a diversified portfolio of long-life, low-cost energy assets”.

A merger would place the company in the top-20 ASX-listed companies and the 20 largest global oil and gas companies.

Oil Search rejected the initial offer as it did not offer appropriate value for shareholders but has said it is open to further approaches.

Santos has subsequently sought to engage the Oil Search board on the transaction rationale and the opportunity for Oil Search shareholders to participate in the value created by the merger.

Santos has a market capitalisation of about $13.5 billion while Oil Search is valued at about $7.6 billion.

Oil Search shares were up 6.2 per cent to $3.90 following yesterday’s announcement while Santos shares fell to $6.49 from $6.82 at the beginning of trade on Tuesday.

With offices in Sydney, Port Moresby, Alaska, Tokyo and Abu Dhabi, Oil Search has a history of active exploration in Papua New Guinea dating back to the 1920s.

It assumed operation of the Hides Gas-to-Electricity Project in 1998 and all of PNG’s producing oil fields in 2003. It also has a 29 per cent stake in the PNG LNG, which commenced operations in 2014 and is operated by ExxonMobil.

Oil Search also acquired oil leases on the Alaskan North Slope in 2018.

The Merger Proposal provides that the transaction would be implemented through a Scheme of Arrangement under which Oil Search shareholders would receive 0.589 new Santos shares for each Oil Search share held.

Following approval of the Scheme, Oil Search shareholders would own 37 per cent of the merged group and Santos shareholders would own 63 per cent.

The ownership ratio implied a transaction price of A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021. This represented a 12.3 per cent premium to the Oil Search closing price on 24 June 2021 of A$3.78.

“The potential merger of Santos and Oil Search is a logical combination of two industry leaders to create an unrivalled regional champion of size and scale,” the Santos statement to the ASX yesterday said.

“The combination would create greater alignment in Papua New Guinea supporting the development of key projects including Papua LNG, deliver new jobs and help support the local economy.”

In Oil Search’s response, also published on the ASX yesterday, said it was always open to receiving and engaging on any proposal that is in the best interest of shareholders.

“Oil Search agrees with Santos that there is a strategic logic in a combination of the two companies,” it said in the statement.

“Oil Search has communicated to Santos that it is open to receiving a revised proposal which more appropriately reflects the value which Oil Search would bring to any combined entity.

“At this stage no such proposal has been forthcoming.”

With its origins in the Cooper Basin, Santos has one of the largest exploration and production acreages in Australia and extensive infrastructure.

It is already Australia’s largest domestic gas supplier and aims to be a leading Asia-Pacific LNG supplier.

In March, Santos approved its $4.7 billion Barossa project north-west of Darwin, which it says represents the biggest investment in Australia’s oil and gas sector since 2012.

Santos ranked No. 1 in InDaily’s 2020 South Australian Business Index – an annual review of the top private and public companies in the state.

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