The takeover would have handed control of assets critical to Australia’s energy security to the Abu Dhabi government at a time when the country’s east coast is facing a persistent threat of gas shortages.
The forecast shortfalls have prompted the Albanese government to flag a possible domestic gas reservation system that will affect Santos and its GLNG export venture in Queensland.
But an XRG spokesman rejected suggestions that a likely domestic gas reservation system or extra requirements on GLNG on domestic gas supply had played into the decision to walk away. “Categorically this decision had nothing to do with government policy,” he said.
South Australian Premier Peter Malinauskas said he was advised by the ADNOC consortium late Wednesday that the SA government’s hardline stance on the takeover was not a factor in the bid being pulled. Those demands included assurances around gas supply at reasonable prices from the Moomba gas plant as well as maintaining Santos’ headquarters and operations in the state.
“I made it very clear from the outset, including in meetings at senior levels with ADNOC themselves, that the South Australian government wasn’t going to support a transaction unless it genuinely advanced the interests of the state,” Malinauskas said.
The SA premier said he did not care if the state’s approach had helped topple the deal.
It’s the third time that a takeover proposal for Santos has fallen through. There was a rejected approach by US private equity player Harbour Energy in 2017-18, and talks with Woodside in late 2023 on a merger that were abandoned within two months.
This has triggered speculation from analysts that Santos, which has been under pressure from shareholders to create more value, may need to consider a break-up, or asset sales. Santos shares fell 12 per cent to $6.74 on Thursday.
Shareholders ‘bruised’
“Another failed transaction creates doubt in the market,” said E&P Financial Group energy analyst Adam Martin. “It’s unlikely Santos remains in its current form in time with investors/management looking for alternative ways to create value.”
Jarden analyst Nik Burns said he expected Santos’ shareholders to be “bruised” by the sudden withdrawal of the offer and to question the board and management on their negotiation tactics.
MST Marquee energy analyst Saul Kavonic suggested Santos may need to consider “a refreshed leadership and strategy” to take the company forward.
“There should still be an opportunity for Santos to sell down some assets to realise value and fund more growth to deliver for shareholders. It’s unclear if this can happen under the current leadership,” Kavonic said.
But some Santos investors voiced strong support for the company’s chief executive Kevin Gallagher, while suggesting the company may need to consider asset sales to unlock value in the portfolio.
Wilson Asset Management portfolio manager Matt Haupt said he still had confidence that Gallagher and the board had the right strategy with free cash flow set to rise substantially as the Barossa gas project in the Timor Sea, and the Pikka oil project in Alaska, came online. The $6.1 billion Barossa project is due online this month.
“Trying to unpick the business, and separate the domestic gas business is problematic,” Haupt said. “Who is the natural buyer of the domestic gas business? We still have faith in Kevin Gallagher, as long as he has the energy.”
Wavestone Capital portfolio manager Raaz Bhuyan said he was disappointed at the deal’s failure but retained “100 per cent” confidence in Gallagher to lead the company and potentially create value out of asset sales.
“The onus is now on the CEO and his team to try and extract value because there is a lot of option value inside the business – the hard work still needs to get done.”
Bhuyan backed the hardline negotiating approach of the Santos board on the timing and structure of the deal: “The board has made the right call because otherwise they lose good people, the business loses momentum.”
Merlon Capital portfolio manager Kirit Hira also said he remained supportive of Gallagher and of Santos as it stood. He said it would reap the cash-flow benefits of its new projects starting up, but added a strategic review could be required if the market did not give Santos credit for that once the new projects were fully online.
“If the market is not willing to give credit or some valuation to that cash flow it probably does require some kind of strategic review … it could be asset sales, it could be break-ups, it could be status quo in terms of the options on the table, but I think that would be the right juncture for that to happen. Now we want the management team to refocus on the business, on project execution and operations.”
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