After a weekend of talks, Oil Search Ltd.’s board said Aug. 2 that it will unanimously recommend to shareholders an improved $6.2 billion (A$8.4 billion) buyout offer from Santos Ltd. Both companies’ shares rose on the news.
Subject to due diligence, if the deal goes through it will put Australia-based Santos in the top 20 global oil and gas companies with a market capitalization, or value, of approximately $16 billion (A$22 billion), giving Santos a stronger balance sheet and access to debt markets with the combined company having an investment grade credit rating.
Santos would own oil and gas assets in Australia, Papua New Guinea and Alaska, with the prime asset considered to be Santos and Oil Search’s combined 42.5% stake in the PNG LNG project, exceeding project operator Exxon Mobil Corp.’s 33.2%.
According to Santos CEO Kevin Gallagher the combination would create an “unrivalled regional champion of size and scale with a unique diversified portfolio of long-life, low-cost oil and gas assets.”
“The Oil Search board believes that the Revised Proposal presents Oil Search shareholders with an opportunity to maintain ongoing exposure to Oil Search’s portfolio of world-class assets as part of a merged group for which there is strategic logic,” Oil Search said in a regulatory filing, as reported by Market Watch.
Santos’ offer implies a transaction price of $3.16 a share, representing a 16.8% premium to the Oil Search closing price on July 19, Santos said.
Oil Search shareholders would own about 38.5% of the combined company and Santos shareholders would own about 61.5%.
ConocoPhillips in picture?
Santos is said to have a working relationship with ConocoPhillips, presumably, in part, because of its purchase of ConocoPhillips’s assets in northern Australia for more than $1 billion in 2020, including a controlling interest in the Darwin LNG export project.
The subject of a possible Santos buyout of Oil Search came up in a recent interview with a long-time Petroleum News source, who said, “I bet Ryan Lance is rubbing his hands together right now and smiling at the thought of Pikka going up for sale. Oil Search and Repsol’s acreage is perfectly positioned between Conoco assets. It would be a perfect acquisition - if the price is right. It would pretty much give ConocoPhillips control of western North Slope infrastructure.”
There has been no public indication from ConocoPhillips, which has a market capitalization of approximately $76.43 billion, that it has an interest in acquiring Pikka, Horseshoe or any of operator Oil Search’s North Slope acreage. (Pikka is a conventional oil play with a greenhouse gas emissions intensity approximately 75% lower than the current North Slope average, per Wood Mackenzie’s Emissions Benchmarking Tool.)
Santos has not previously expressed an intertest in Alaska and has always taken pride in the fact it a major player in the Australia region.
But Santos might have a buyer for Alaska acreage in ConocoPhillips.
Lance open to acquisitions
In ConocoPhillips second quarter conference call on Aug. 3, Ryan Lance, chairman and CEO, answered questions about the company’s position on mergers and acquisitions, in part because ConocoPhillips has nearly $9 billion of cash and short-term equivalents on its balance sheet.
Lance’s responses indicate interest should Santos put the Alaska assets on the market for a reasonable price.
“We know the assets in the areas that we really like. And you shouldn’t be surprised if we’re looking at opportunities … contiguous to where we operate,” Lance said.
“When we think about the market, our approach is to constantly know what assets we like … we’re constantly screening opportunities to both buy and sell assets.”
One advantage that Lance gives ConocoPhillips in the market is that it’s “a global diversified company,” with operations in several countries, which is closer to what regional player Santos would be if it keeps the Alaska properties, which Oil Search operates and has controlling interest in.
Part of the advantage of being globally diversified, Lance said, is the fact that some areas of the world, including the Lower 48, are fighting inflation, which is balanced out by deflation in other countries.
What “matters to us” in acquisitions is “to keep at the rigor and the discipline that we described back in 2019,” he said, more than once noting acquisition opportunities “have to compete within our cost of supply framework and the discipline that we’ve brought to that.”
Pikka nearing FID
The Pikka unit is west of the central North Slope, with its largest reservoir the Brookian Nanushuk. The latest 2C contingent resource estimate is just under 1 billion barrels of light oil.
In addition to the nearby Horseshoe Nanushuk discovery that would likely be developed separate from Pikka, Oil Search recently made two more nearby oil discoveries - at Mitquq (172 feet of net hydrocarbon pay, including a 29-foot gas cap) and Stirrup (net pay of 75 feet) - which have not yet been appraised.
Pikka is currently finishing up FEED, or front-end engineering and design work.
Oil Search told Petroleum News Aug. 2 that the “Pikka project is ready for FID from a technical perspective, and we are continuing to pursue a variety of funding opportunities.”
That statement came from Amy Burnett, U.S. media and communications manager for the company. She is based in Anchorage.
FID stands for final investment decision. The company’s goal had been to have its technical, permitting and financial package for the Pikka development ready for FID by early November.
In a July 19 investor update/conference, acting Oil Search CEO Peter Fredricson said the activity leading up to FID “includes the work we are currently doing on a possible joint sell-down of equity in the project (with partner Repsol), consideration of the sale of mid-stream infrastructure within the project and reviewing relevant markets for an appropriate level of debt financing to support the project.”
Tom Stokes, director of Alaska’s Division of Oil and Gas, said that Pikka permitting is still moving forward.
