The share price of Santos Ltd (ASX: STO) and Oil Search Ltd (ASX: OSH) are both rising after agreeing to a merger.
Oil mega merger
The two ASX oil giants have agreed on a merger ratio.
Under the revised merger proposal, Oil Search shareholders will receive 0.6275 new Santos shares for each Oil Search share held.
If, or when, the deal goes ahead then Oil Search shareholders will own approximately 38.5% of the combined company, whilst Santos will own the other 61.5%.
Assuming the deal gets the required tick of approval through due diligence and the companies can get the deal signed, the Oil Search board said it intends to unanimously recommend the deal assuming that there’s no better offers and that an independent expert agrees the takeover is in the best interests of shareholders.
What is the price for Oil Search shareholders?
This merger implies a transaction price of $4.29 for each Oil Search share. This offer represents a 16.8% premium to the Oil Search share price on 19 July 2021.
Why are they merging?
Santos said that the proposal represents the opportunity to deliver compelling value accretion to both sets of shareholders.
It will see the combined business have a diversified portfolio of high-quality, long-long, low-cost assets across Australia, Timor-Leste, PNG and North American with “significant growth optionality.”
This combined business would have an estimated market cap of $21 billion. It would make it a top 20 ASX business and one of the largest 20 oil and gas companies.
The combined 2021 production is expected to be approximately 116 million barrels of oil equivalent (MMboe). It would also have a combined resource base of almost 5,000 million barrels of oil equivalent.
It’ll have more than $5.5 billion of liquidity to fund development projects.
There are also “substantial” potential synergies.
Management comments
Santos Managing Director and CEO Kevin Gallagher said the potential merger of Santos and Oil Search is consistent with Santos’ disciplined strategy to grow around its core assets:
“The merged company would have strong cash generation from a diverse range of assets which provides a strong platform for sustainable growth and continued shareholder returns.
“The merger also builds on our industry-leading approach to ESG through the combination of Santos’ net-zero 2040 pathway, including its sector-leading CCS projects, and Oil Search’s unique social programs in PNG, underpinned by a strong balance sheet to fund the transition to a lower carbon future.”
Summary thought on the Santos and Oil Search share price
This merger seems to make a lot of sense for both companies. Bigger scale comes with a lot of benefits. However, I’m not sure how much I’d want to pay for an oil business with the expected shift to less oil in the future.
There are other ASX dividend shares in the non-oil space I’d rather look at for long-term reliability.
