Chanticleer
Big oil’s $179b deal spree adds to push for action at Santos
Exxon and Chevron’s mega-mergers are a sign big energy companies are moving to cash in on the sector’s “golden sunset”. Can Santos do the same?
All of a sudden, it’s go-big-or-go-home time for America’s energy giants.
Just weeks after ExxonMobil paid almost $US60 billion ($95 billion) for Pioneer Natural Resources, Chevron has announced it will pay $US53 billion ($84 billion) for Hess Corporation, which will give Chevron a 30 per cent stake in ownership of more than 11 billion barrels-equivalent of recoverable resources in Guyana, one of the world’s major new oil producers.
Santos chief executive Kevin Gallagher has been meeting with investors. David Rowe
As former Woodside Energy boss Peter Coleman told The Australian Financial Review Energy & Climate summit earlier this month, big energy is pivoting back towards fossil fuels – and hard.
These acquisitions reflect the structural change under way in oil and gas. They are recognition that years of underinvestment in new supply – partly for ESG reasons, partly because fossil fuel demand will fall as the energy transition rolls out – have left the market short, and are likely to have put a higher floor under prices.
The deals suggest Exxon and Chevron see decades of strong demand, meaning there is a window where owning good-quality oil and gas assets will be very, very lucrative for players with scale. EIG’s proposed acquisition of Origin’s LNG assets is yet another example of this trend.
Which brings us to Santos, which this month became the subject of an activist campaign by Melbourne fund L1 Capital. The firm’s Catalyst fund has suggested breaking Santos into an LNG business and a conventional oil and gas business, in no small part because the LNG unit would probably become a takeover target for energy majors.
Santos chief executive Kevin Gallagher and chairman Keith Spence have been meeting with investors since Chanticleer broke the news of L1’s campaign last week. The company’s long-time advisers, Goldman Sachs and Citi, have also been taking the temperature of shareholders ahead of Santos’ investor briefing day on November 22.
L1 wants the board to begin a strategic review to consider the breakup and other options that could help unearth value at Santos; in the past two years, the company has delivered total shareholder returns of just 11 per cent, while Woodside and an index of global peers including Chevron, Shell, ExxonMobil, BP and ConocoPhillips have delivered 70 per cent.
While the fact Santos only completed its takeover of Oil Search two years ago is seen as a hurdle for any break-up, other observers suggest a break-up would want to avoid damaging the economics of Santos’ Queensland LNG businesses, which is reliant on Santos’ domestic gas production.
But these are the sorts of issues that a strategic review can work through. What investors want to see is a plan that helps the market re-rate Santos.
MST Marquee’s senior research analyst, Hasan Tevfik, who on Tuesday backed the L1 push, argues big energy appears to be going down a similar path to big tobacco, which was able to exploit its “golden sunset” by leveraging its pricing power, cutting capital expenditure to boost free cash flow and turbocharging returns to shareholders.
“Equity markets struggle to value companies and industries in decline. Tobacco companies certainly knew how to manage their own decline, and mega-cap US energy companies appear to be moving in the right direction. Aussie energy companies still have work to do,” Tevfik says.
“Santos has been in our long portfolio for several years. The company has so far been disappointing in allocating capital, but we’re hopeful this will change.”
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