Santos shares belted 11 per cent lower as bid rejection increases pressure on management and strategy

Santos boss Kevin Gallagher has come under immediate pressure to change tack after a third failed bid to sell the energy group revived investor questions about its leadership and strategy. Santos shares plunged as much as 14 per cent on Thursday following an Abu Dhabi-led consortium’s decision late on Wednesday to quit its indicative $29 billion offer for Australia’s second biggest oil and gas company after three months of due diligence. The stock closed 11.6 per cent lower at $6.74, giving up $2.1b in value to $21.9b. The abandonment of the cash bid, Australia’s biggest ever, has renewed calls for Santos to reconsider a change of management and perhaps hive off its LNG assets to meet investor demands for better returns. “Santos management is likely to face increasing shareholder pressure to pivot to a new strategy to increase returns,” Josh Runciman, the lead financial analyst at Institute of Energy Economics and Financial Analysis, said. “This may include Santos divesting its LNG assets, but whether Santos’ current management is willing to do so is another question,” Mr Runciman said. “Santos continues to back its growth strategy to provide to shareholders long-term, but several recent failed attempts to sell the business naturally raise questions about the value of this strategy.” MST Marquee senior energy analyst Saul Kavonic, a critic of Santos in the past, said the company may be best served by a change of management. “Santos may need to consider a refreshed leadership and strategy“, given the Middle East consortium is the second suitor to have walked from Santos in the past two years, following failed talks with Woodside Energy 18 months ago. The Adelaide-based group rejected multiple offers by US company Harbour Energy in 2018. “There could still be an opportunity for Santos to sell down some assets to realise value and fund more growth to deliver for shareholders, but it’s unclear whether this can happen under the current leadership,” Mr Kavonic said. E&P analyst Adam Martin said “another failed transaction creates doubt in the market” and it was “unlikely Santos remains in its current form in time with investors and management looking for alternative ways to create value”. Some investors, however, said without the distraction of the bid, Santos could now fully reap the benefits of its major new projects at the Barossa gas fields off northern Australia and the Pikka oil development in Alaska. The bid consortium, which was led by the Abu Dhabi National Oil Company’s XRG but included the United Arab Emirates’ sovereign wealth fund and private equity group Carlyle, lobbed a cash offer of $US5.76 ($8.89) a share for Santos in mid-June that valued the company at $29 billion. The Santos board endorsed the offer, since reduced to $US5.626 by the company’s last dividend, and opened up its books for due diligence. Santos had been pressuring the consortium to finalise a binding bid by Friday’s extended deadline. Instead, XRG said on Wednesday it had walked away because of “a combination of factors” that had “impacted the consortium’s assessment of its indicative offer”. The group declined to comment publicly outside its statement but sources blamed frustration over Santos’ insistence that the consortium assume liability for a capital gains tax payment due to the PNG Government next year and media disclosures last month of a methane leak at Santos’ Darwin LNG project. The sources said the two issues had materially affected the offer price and undermined the bidders’ confidence in Santos’ disclosures. “Issues impacting valuation that were discovered during due diligence, an intransigent Santos’ approach to the process, and increased awareness of the approvals scrutiny and timeframes going forward may all have factored into XRG’s considerations in walking away,” Mr Kavonic said. Santos did not refer to either issue, but said it had expressed concern about the delays in finalising the offer and the consortium’s refusal to safeguard investors by agreeing “to acceptable terms which protected the value of the potential transaction for Santos shareholders, having regard to the likely extended timeframe to completion and the regulatory risk associated with the transaction”. Also the consortium had not agreed, it said, to “an appropriate allocation of risk” when considering regulatory approvals and guarantees around the supply of domestic gas in Australia. “Santos has a clear strategy, strong leadership and high-quality growth opportunities across our global portfolio. The board is confident these strengths will deliver long-term value for shareholders,” Santos chair Keith Spence said.