Santos confirms merger discussions with Woodside

A$80 billion merger talks have commenced

Woodside and Santos have confirmed media speculation they are discussing a potential merger. In an ASX release yesterday both companies acknowledged that discussions are at an early stage and there is no agreement between the parties.

Woodside is Australia’s largest energy producer and is two and a half times the size of Sanos by market capitalisation. Woodside’s market capitalisation is A$57 billion, compared to the market capitalisation of Santos at approximately A$22 billion. A merged entity of this scale at A$80 billion is equivalent to US$53 billion market capitalisation and would still be dwarfed by major global players like Exxon Mobil Corp and Chevron Corporation with market capitalisations at US$390 billion and US$268 billion respectively.

Recent merger activity

Woodside and Santos have been on an expansionary path over the past couple of years to become two of Australia’s largest oil and gas producers. A merger of the two would create Australia’s largest Liquified Natural Gas (LNG) producer and become the world’s second largest exporter of LNG.

In June 2022 Woodside bought BHP’s oil and gas portfolio, making Woodside a global top 10 energy business. In December 2021 Santos and Oil Search merged to become a low-cost oil and gas producer in the region when Santos acquired the PNG oil and gas assets owned by Oil Search.

Merger rationale

A merger of Woodside and Santos should be value accretive for both parties.

Santos in their ASX release added that it is assessing a range of structural options to unlock value, given the disappointing share price performance over recent months, until news of the merger talks with Woodside appeared in the media two days ago. Santos being the much smaller player stands to benefit by folding its assets into a significantly larger business to be part of a more financially resilient producer capable of funding the upstream and mid-stream production infrastructure needed in a capital-intensive industry like LNG production. Both Woodside and Santos in their annual investor briefings referred to soaring capital expenditure requirements to commercialise their ongoing projects. A merger would ease some of this cost and funding pressure on their respective balance sheets.

Woodside by becoming an A$80 billion market capitalisation company would gain improved leverage with LNG buyers and among other global energy companies that continue to grow by acquisition of smaller players.

Australia as a nation has much to benefit from a merger of Santos and Woodside because a reliable source of energy is always going to be a top priority for an energy-dependent economy like Australia.  Oil and gas will be required for many decades to come and the taps on oil and gas cannot be turned off before replacement technologies are technically feasible, affordable, and available. Until then the world’s decarbonisation strategy must include pathways to abate emissions from these fuels. Both Woodside and Santos are committed to an abatement solution through large-scale carbon capture and storage and technologies such as direct air capture. There are significant capital expenditure amounts required to achieve these outcomes.

Oil and gas provide more than half of the world’s primary energy today and will remain a significant energy source for decades to come. As one of the world’s major energy suppliers, and especially the proximity to the growing Asian market, a merger between Santos and Woodside is fundamentally commercially sound and is in the best long-term interests of Australia’s energy future.