Abu Dhabi National Oil makes $28.9b play for Australia’s Santos

A Middle Eastern oil company’s $29 billion bid to buy Australian energy major Santos will be a “huge opportunity” for the Federal Labor Government to extract domestic gas concessions, a top analyst has declared.

But the mega-acquisition will also be a major pressure point for Treasurer Jim Chalmers, who ultimately needs to green-light or knock back the foreign investment into critical energy assets.

Abu Dhabi National Oil Company emerged on Monday as the long-awaited suitor for Adelaide-based oil and gas producer Santos.

It was heading up a consortium including private equity giant Carlyle and the United Arab Emirates’ sovereign wealth fund Abu Dhabi Development Holding Company.

The group lobbed a $US18.7b all-cash offer, pricing Santos at $8.89 per share, a 28 per cent premium to the energy major’s closing price on Friday.

Santos’s board backed the deal in the absence of a better proposal. Investors welcomed the news and shares surged 11 per cent to $7.72.

Yet the move will face severe political scrutiny in a climate of growing concern about energy security, as Santos is among the largest Australian petroleum producers.

The company, led by chief executive Kevin Gallagher, runs the Darwin LNG plant, Queensland’s Gladstone LNG, and Papua New Guinea LNG offshore.

The business also supplies about 16 per cent of WA’s domestic gas through Varanus Island.

That role as a major energy exporter and supplier will add to the maze the buyers need to navigate to secure approval from Australia’s Foreign Investment Review Board, and a host of regulators overseas.

Adding to the uncertainty will be Adnoc’s status as a UAE Government state-owned company.

FIRB’s advice will inform a decision by Dr Chalmers, and become the first major test of his views on foreign ownership of critical infrastructure.

Dr Chalmers acknowledged in a radio interview that it would be “a big decision” and he pledged to listen closely to advice from FIRB.

“This is potentially a very large transaction,” he said.

“There are, as I understand it, still a number of steps that need to happen before it becomes a transaction.

“I will listen very closely, if it comes to it, to the advice of the FIRB but I won’t pre-empt that advice.”

MST Maquee head of energy research Saul Kavonic said Labor would have a “huge opportunity” to extract concessions for domestic gas supply.

He said the timing would line up with a government review of the east coast gas market. An option for the buyers would be to spin out the domestic gas assets, although that portfolio would carry big decommissioning liabilities.

Citi head of research Paul McTaggart also said approval by FIRB “may be a significant hurdle” as the company is a key producer in the domestic market.

Debate about local gas was white hot in recent months and Resources Minister Madeleine King recently weighed in to warn the industry to pump more gas into the east coast system.

Victoria in particular is facing a substantial gas shortage by the end of the decade after a ban — eventually overturned — on petroleum exploration for years.

Former Coalition leader Peter Dutton also waded in before the Federal election with a proposal to force gas to domestic customers.

Acting shadow treasurer James Patterson on Monday moved to up the pressure on Dr Chalmers by saying there must be a serious and robust test of national interest.

“The Australian public has a right to know what this deal means for energy security, for Australian jobs, and for the long-term control of our key economic assets,” he said.

Santos’ stock had risen in recent months on speculation that Middle Eastern energy producers including Adnoc and Saudi Aramco were circling the company.

In 2018, Santos rejected multiple offers from US-based Harbour Energy, while talks with Perth-based Woodside Energy broke down last year.

It has now emerged the Adnoc consortium launched two previous proposals in March. Yet another bidder may not arrive.

“There is little chance of a competing bid given the premium XRG are paying,” Mr Kavonic said.

“Santos have been for sale for a while with no bites.

“(The company has) managed to flush out the one bidder willing to bid against itself. (Kevin) Gallagher has found his escape parachute and it’s made of gold.”

An alternative floated by investors in 2023 had been for the company to split its coveted LNG assets from oil operations in Alaska and the domestic gas business in Australia to cash in on higher valuations.

Analysts from E&P Capital on Monday downgraded Santos stock from a positive rating to neutral because the company had been waiting more than two years on a potential acquisition.

“That said, now does feel like an opportune time to acquire Santos with risks building on energy prices and Santos entering a free cash inflection phase with the completion of several major growth projects,” the note authored by E&P executive director Adam Martin said.

“We think today’s announcement will also provide greater focus on the inherent value of LNG assets, with media reports that Adnoc is also interested in BP’s LNG and gas assets.”

Woodside was pursuing its own talks with oil giant Saudi Aramco for investment into the Louisiana LNG project, he observed.

Goldman Sachs and JB North & Co are acting as financial advisers to Santos. Rothschild & Co is acting as independent board adviser. Herbert Smith Freehills Kramer is acting as legal adviser to Santos.