Middle East reignites Santos' M&A pipe dreams
Corrects in paragraph 5 to show enterprise value is $24 billion, not $20 billion. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Antony Currie
MELBOURNE, July 4 (Reuters Breakingviews) -Santos STO.AX CEO Kevin Gallagher has been making it abundantly clear for a while that he's up for selling parts or all of the $17 billion Australian oil and gas driller.
Last November, for example, he told investors he was "very frustrated" with the share price and that his door is open "seven days a week" for anyone with an offer. He reiterated the sentiment in May, three months after merger talks with local rival Woodside Energy WDS.AX collapsed. Now Saudi Aramco 2223.SE and the Abu Dhabi National Oil Company have each separately taken an initial look, Bloomberg reported on Thursday, citing unnamed people with knowledge of the matter. Chances are that they, too, will leave Gallagher hanging.
Santos has plenty to offer to its carbon-belching peers. The company operates several gas fields on and offshore that would appeal to players convinced that demand for that particular fossil fuel will endure through the transition to renewable energy. That could on paper be a handy diversification play for the two oil-heavy Middle Eastern state firms.
That it's now public that the pair have been sniffing around Santos may yet lure in some of the Western oil and gas majors like BP BP.L and Chevron CVX.N that already operate Down Under. That, though, did not appear to happen earlier.
The trouble Gallagher is having is that an acquirer has to accept some pretty ho-hum returns. Assume the purchaser pays 20% more than Wednesday's closing stock price, it would value Santos's enterprise at some $24 billion. With operating income -after assuming 25% tax - expected to be around $1.7 billion both this year and next, per data compiled by LSEG, the return on investment would barely squeak above 7%.
A new owner would then have to cut around a quarter of Santos' operating expenses to boost the return above the target's 9% weighted average cost of capital. And that assumes the premium would be enough to mollify Gallagher's frustration; it’s previous effort to sell itself failed over valuation.
Of course, low returns don't prevent companies striking deals. Chevron, for instance, is looking at an 8.5% return on its acquisition of Hess HES.N. But it's a good reason for Santos to be left to its own devices.
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CONTEXT NEWS
Saudi Aramco and the Abu Dhabi National Oil Company are each separately considering making an offer to buy Australia's Santos, Bloomberg reported on July 4, citing unnamed people with knowledge of the matter.
In February Santos and rival Australian driller Woodside Energy ended discussions about a possible merger.
Santos shares were up more than 5% in morning trading on the Australian Securities Exchange.
Santos' shares recovered after previous M&A talks failed https://www.reuters.com/graphics/BRV-BRV/egpbojyozvq/chart.png
Editing by Una Galani and Aditya Srivastav
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