Oil and Gas: STO revised offer finds support

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
03 August 2021, 8:00 AM
Sectors Covered:
Mining, Energy

  • Santos Limited (ASX:STO) & Oil Search (ASX:OSH) have found mutual ground on the proposed merger, with STO having increased its offer to 0.6275 STO shares (was 0.589).
  • The OSH board has indicated it is likely to recommend the new merger proposal. 
  • OSH share price has outperformed on the news, as investors take positions before OSH merges into MergeCo (large formidable Top 20 STO-managed producer). 
  • STO and OSH holders will likely both benefit from a merger of the two entities, with more than synergies to be gained.

News: STO revised merger offer for OSH

A revised merger proposal has been made by Santos Limited (ASX:STO) to Oil Search (ASX:OSH), with the latter confirming its intention to recommend the offer post the due diligence process, which is expected to take 4 weeks. 

STO will now offer 0.6275 STO shares for every OSH share held, up from the original offer of 0.589. 

Based on pre-merger news prices, the transaction values OSH on A$4.29ps. Still a discount to our (login to view) target price on OSH, but the scrip merger will bring with it other benefits to holders from combining the two businesses. 

Analysis: More than synergies on offer

From measuring the potential synergistic and cost of capital benefits alone we estimate the transaction could create more than A$1bn in value.  

However, there are also other benefits on offer. We see a scenario, post-merger, where the merged entity (“MergeCo”) could seek to divest its interest in Alaska (greenfield oil project with ESG complexities given it is located in the Arctic) and channel those proceeds back into supporting STO’s flagship growth projects in Barossa and Dorado (both located in Australia).  

We also expect the addition of ‘chunky’ earnings from OSH’s stake in PNG LNG T1 & T2 will also help STO to fund its key growth projects. 

MergeCo would then be in a position to also pursue the longer-dated Papua LNG that would follow afterwards (current estimate is for first gas in 2027). 

We will need to see how MergeCo’s overarching strategy takes shape once the transaction proceeds, but, at the very least, we do see material synergies on offer, with OSH having approximately 2/3 the corporate overheads of STO.


Due diligence outcome (approximately 4 weeks). 

Presentation of new strategy for MergeCo (post-due diligence). 

Transaction finalization (3-6 months). 

Sell-down of growth asset equity on either side (Doardo, Barossa or Alaska/Pikka).

Investment view

ADD rating maintained on both STO and OSH at current prices. 

We believe STO investors will benefit from the third transformative acquisition made by current management, who have demonstrated a track record of successful business integration. We maintain our (login to view) target price. 

Key risk to our call on STO is primarily COVID-19 related, and the potential for further fallout in energy demand (oil/gas/LNG). 

While we also expect OSH holders will also see long-term upside created from participation in the merged entity that could exceed our current A$4.60 target price. 

Key risks to our OSH call in the short term is execution on the merger proceeding, as well as ongoing COVID-19 risks to demand factors. 

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


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