Abu Dhabi’s national oil company has made a big bet on the future of gas with a $36 billion bid for Santos, setting up a major test for Labor over the ownership of assets critical for Australia’s energy security.
The deal would hand shareholders in the ASX’s second-largest oil and gas producer almost $30 billion in cash, but has been met with a lukewarm reception from investors and the South Australian government, where Santos was founded 71 years ago and remains headquartered.
The $US5.76-per-share bid, which has been endorsed by the Santos board and came after two earlier, lower offers, comes amid surging oil prices during an escalating conflict between Israel and Iran. Brent crude climbed as much as 5.5 per cent on Monday morning before settling at around $US75 a barrel.
Other Gulf oil giants have also been scrambling to capture a slice of the LNG market, convinced that gas will be sought after as the world moves away from fossil fuels. Last month, Saudi Aramco, the world’s largest oil company, signed a deal with Woodside Energy to pursue joint investments.
Treasurer Jim Chalmers said the deal was “potentially a very large transaction” and he would listen to the advice of the Foreign Investment Review Board before deciding whether to approve the sale to the consortium led by XRG, the Abu Dhabi government’s investment arm.
The bid, equivalent to $8.89 per share, represents a 28 per cent premium over Santos’ closing price on Friday and is 44 per cent higher than where it has traded over the past three months. If successful, the proposed deal would be the largest all-cash takeover of an ASX company.
The Australian Financial Review’s Street Talk column on Sunday revealed the discussions between Santos and the Abu Dhabi National Oil Company, known as Adnoc. Others in the consortium include Abu Dhabi Development Holding Co and The Carlyle Group, a major private equity firm.
Underlying Abu Dhabi’s interest is Santos’ growing LNG portfolio, which includes its stake in a world-class project in Papua New Guinea, and its Barossa project, poised to start production in the Timor Sea.
XRG is targeting assets of more than $US80 billion ($123 billion) and wants to have the capacity to produce 25 million tonnes of LNG annually by 2035. The sovereign wealth investment firm could be interested in some of BP’s prized LNG assets, Bloomberg reported last week. It assumes that LNG demand will jump 60 per cent by 2040 as the use of coal slumps.
But investors are divided on the offer – even as Santos spiked as much as 15 per cent higher to $8.02. That remains well below XRG’s proposed takeover price, reflecting significant uncertainty about whether the deal will secure foreign investment clearance. The stock closed at $7.72, up 10.9 per cent.
“It’s fair, it’s not exceptional,” Wilson Asset Management’s Matt Haupt said of the price. “To let it go at $8.80 seems slightly underwhelming. The biggest thing is losing another stock from the ASX – it’s disappointing.”
Kirit Hira, a portfolio manager at Merlon Capital, also described the price as “fair”, calculating that it implies long-term oil prices well into the mid-to-high $US70s per barrel. Merlon Capital is among investors disappointed with Santos’ share price underperformance, given the amount of work that it has put into overhauling its assets and the imminent increase in cash flows as the Barossa and Pikka oil project in Alaska start production.
Katana Asset Management portfolio manager Romano Sala Tenna said he was surprised the Santos directors had endorsed the price, believing they would be wanting north of $9 a share. “I thought it would have been a bit higher; I thought it would have a nine handle on it,” he said.
But Wavestone Capital portfolio manager Raaz Bhuyan said the bid – which values Santos’ equity at $28.9 billion and its enterprise value, which includes debt, at $36.4 billion – came at a time when there was a broader reluctance to invest in fossil fuel stocks, despite the enduring role of gas.
“It is not a great price, but I think it’s a fair price,” Bhuyan said. “I think most shareholders would be [satisfied]. The world has changed, and the expectations of what value is in the energy sector have changed.”
The two previous cash offers from the consortium were at the equivalent of $8 per share and $8.60 per share, both lobbed in March.
If completed, the transaction would be the largest all-cash takeover in ASX history, and behind only Square’s takeover of AfterPay and the Unibail-Rodamco takeover of Westfield in deals that include scrip.
The board, led by chairman Keith Spence, told investors that it had granted the consortium access to confidential information and due diligence on the company to firm it up, expected by the end of July. It intends to unanimously recommend the bid to shareholders in the absence of any higher offer, and if an independent expert deems it “fair and reasonable” for shareholders.
But regulatory hurdles are expected to be significant, with approvals needed from the FIRB, the offshore petroleum regulator and the Papua New Guinea government. In an attempt to allay concerns, XRG has committed to keeping Santos’ headquarters in Adelaide and retaining its brand, as well as investing in growth and in communities where the company operates.
But MST Marquee analyst Saul Kavonic said that FIRB approval would be a major risk to the deal, given Santos’ control of significant critical energy infrastructure in Australia. “Spinning out the domestic infrastructure is not straightforward, given the large decommissioning liabilities associated with it,” Kavonic said. “Carlyle may have interest in this aspect.”
Still, people close to Santos pointed to the close trading relations between Australia and Abu Dhabi, its biggest trading partner in the Middle East, with two-way trade worth $9.94 billion in 2023. The two countries inked an economic partnership deal last September, with Trade Minister Don Farrell pointing out at the time that the pact would facilitate investment.
A Treasury spokesman said foreign investment matters were reviewed on a case-by-case basis “to ensure the investments are not contrary to the national interest or national security”, but declined to comment further.
The SA government, which until 2007 imposed a 15 per cent shareholding cap on Santos that rendered a takeover impossible, said it had “levers” it could pull to influence the ultimate outcome of the proposal. Energy Minister Tom Koutsantonis pointed to state government approvals that were required for a change in control of oil and gas licence holders.
A competing bid was unlikely, as only Adnoc may be willing to pay such a premium to realise their global LNG ambitions, MST’s Kavonic said.
