Woodside and Santos confirm merger talks that would reshape global energy landscape

Australia’s two leading local oil and gas companies, Woodside Energy (ASX: WDS) and Santos (ASX: STO), have officially confirmed they are involved in discussions that would create a mega petroleum business.

In separate statements to shareholders and the media, Woodside and Santos confirmed speculation that they have been in talks regarding a potential merger.

“Discussions remain confidential and incomplete and there is no certainty that the discussions will lead to a transaction,” Woodside said in its statement.

“As a global energy company, Woodside continuously assesses a range of opportunities to create and deliver value for shareholders.”

“Woodside will continue to update the market in accordance with its continuous disclosure obligations.”

Santos reviewing opportunities

Santos said the discussions were part of the company’s continuous review of opportunities to create and deliver value for shareholders.

“Concurrently, Santos is assessing a range of alternative structural options with a view to unlocking value as referred to on Santos’ investor day on 22 November 2023,” the company said.

“The consideration of any merger is at an early stage and there is no agreement between the parties. There is no certainty that any transaction will eventuate from these discussions.”

“Santos will continue to update the market in accordance with its continuous disclosure obligations.”

An $80 billion oil business

Estimations are that a successful merger would create an $80 billion oil and gas giant, placing it on the next level of global energy companies.

The merged entity would also become one of the world’s largest LNG producers with potential annual sales of 16 million tonnes.

Alongside its world-scale LNG assets at Pluto and the North West Shelf in Western Australia, Woodside has recently expanded its global portfolio to now include operating assets in the Gulf of Mexico (US) and Trinidad and Tobago.

Earlier this week, Woodside signed a deal to acquire 1.3Mtpa of LNG from Mexico Pacific’s Saguaro Energia project.

The purchase agreement is equivalent to approximately 18 cargoes per year of LNG for 20 years.

Woodside also has significant oil production assets off the coast of WA and the Gulf of Mexico.

Strong balance sheet

Speaking at Woodside’s recent annual investor briefing day, executive vice president finance and chief financial officer Graham Tiver said the company’s balance sheet is well-positioned.

“Our liquidity remains strong, providing ample capacity to meet our expenditure requirements and, at the end of October, our liquidity was approximately $12.2 billion, of which undrawn debt facilities were approximately $9 billion.”

“Subject to completion, we expect to receive the proceeds from the sale of a 10% interest in Scarborough in Q1 2024, totalling approximately $1.3 billion. This will provide further balance sheet flexibility.”

Santos a major regional LNG player

Santos’ upstream gas and liquids business includes an Asian market-focused LNG operation comprising three projects – Papua New Guinea LNG, Gladstone LNG and Bayu-Undan and Barossa to DLNG – and two Australian domestic gas businesses (west coast and east coast).

Speaking at the company’s investor day in Sydney in late November, managing director and chief executive officer Kevin Gallagher reported that Santos’ 2023 production guidance is being maintained at 89 to 93 million barrels of oil equivalent (mmboe) and sustaining capital expenditure guidance is slightly lowered to around $1.1 billion.

Major projects capital expenditure in 2023 was estimated to remain at $1.5 to $1.6 billion.

The company’s production guidance for 2024 is expected to be in the range of 84 to 90mmboe.

Sustaining capital expenditure including decommissioning capital expenditure in 2024 is expected to be approximately $1.25 billion and major projects capex was expected to be approximately $1.6 billion.

If the merger discussions progress, the deal is expected to come under the watchful eye of the Australian Competition and Consumer Commission (ACCC) due to its potential impact on local gas supplies.