A merger between Woodside Energy Group and Santos would lead to the creation of a “bigger, better, deeper, stronger” entity which will be taken more seriously on the global stage, according to Morningstar senior equities analyst Mark Taylor.
But the potential $80 billion merger of two of Australia’s largest oil and gas companies would not be without its challenges, with competition ranking among the key concerns.
In response to media speculation, Woodside and Santos confirmed on Thursday (7 December) that they have entered into preliminary discussions regarding a potential merger, with both companies stressing that there is no certainty that a transaction will actually take place.
Speaking with InvestorDaily, Mr Taylor suggested that it would make “a lot of sense” to combine the two businesses.
“You’ll get some administrative synergies out of it, obviously. There’ll be some advantage in mixing and matching resources with existing infrastructures where it makes sense,” he said.
“With Woodside’s trading side of the business – LNG trading – it’ll help in that regard having a deeper, broader portfolio of LNG production and projects. There’ll be greater diversification.”
Mr Taylor noted that the merger would also give Woodside an entrée into the east coast market. Furthermore, he pointed out that Woodside has long expressed interest in the PNG LNG assets now held by Santos through its acquisition of Oil Search in 2021.
“It makes sense to combine the two entities if they can get away with it,” he continued.
“A combined entity would probably get more invites to seats at tables to look at projects and assets internationally and be taken a bit more seriously.”
Regarding competition, Mr Taylor said that there “could be issues there, particularly on the east coast, where domestic gas supply has been a bit of a sensitive political topic”.
According to analysts, the merged entity would control approximately 26 per cent of the east coast gas market and 35 per cent of the West Australian gas market.
Adding to the potential concerns, Mr Taylor said, is Woodside’s $63 billion merger with BHP Petroleum last year, which created a top-10 global independent fossil fuel company.
“I’m sure they would have considered this already and either think they have a pretty good way to appease any concerns by divesting certain assets, or they think they may even be able to get it through without there being an issue. But one or the other, and they’ll probably take what they can get.”
Harriet Kater, special adviser at the Australasian Centre for Corporate Responsibility (ACCR), said that there are “material regulatory challenges” to consider in regards to the potential merger, “especially considering the ACCC’s ongoing east coast gas inquiry, and the implications for Woodside’s role in the west coast domestic gas market”.
“Should the response to competition concerns be to carve up Santos’ assets between a range of different companies, the deal will get exponentially more complicated,” she said.
“However we do acknowledge that these early-stage discussions are happening at a time of consolidation across the global oil and gas sector, which is an expected, defensive strategy for an industry facing structural decline,” she noted.
“Whether the deal proceeds or not, it is critical that fossil fuel company boards ensure they are governing in the interests of shareholder value rather than progressing high risk expansion strategies in a declining market.”
Mr Taylor concluded that a deal won’t be easy to get across the line. In particular, he suggested that Santos chief executive Kevin Gallagher will have “pretty high expectations” of what Santos shareholders will get out of the potential merger.
As part of its ASX statement on Thursday, Santos indicated that it “continuously reviews opportunities to create and deliver value for shareholders” and is “assessing a range of alternative structural options with a view to unlocking value”.
Meanwhile, in its own ASX statement on Thursday, Woodside said that it “continuously assesses a range of opportunities to create and deliver value for shareholders”.
Shares in Santos have risen by 6.7 per cent since the merger discussions were revealed on Thursday, closing at $7.29 on Monday. Meanwhile, Woodside’s shares have edged 1 per cent higher to $30.26.
