Australian hydrocarbon producer, Santos (STO), received a final nonbinding indicative cash takeover offer of USD 5.76, or AUD 8.89, per share via a scheme of arrangement. The offer, from Abu Dhabi National Oil-led consortium, XRG, represents a 28% premium to the immediately preceding share price.

At this stage, we give the bid 50% chance of success. The proposal is subject to due diligence by XRG, a Santos shareholder vote and regulatory approval, including by Australia’s Foreign Investment Review Board.

FIRB approval is an obstacle. Santos is Australia’s largest domestic gas supplier and a major LNG exporter, and there are sensitivities around foreign ownership. Admittedly, this is probably less so than in the past, given the now increased number of owners of major LNG projects in the country.

Santos’ board intends to unanimously recommend shareholders vote in favor of the transaction in the absence of a superior proposal and subject to independent expert sign-off. A higher offer from a third party is not inconceivable.

We reduce our Fair Value estimate

We reduce our fair value estimate for no-moat Santos by 5% to AUD 9.50. This at the approximate midpoint of our unchanged AUD 10 stand-alone fair value estimate and the AUD 8.89 indicative bid proposal. At time of writing, Santos shares were up 12% to around AUD 7.80 and remained undervalued.

Our stand-alone fair value still assumes a five-year EBITDA compound annual growth rate of 11% to USD 5.9 billion by 2029. This includes near 70% production increase toward 150 million barrels of oil equivalent, capturing first production from new projects Darwin LNG, Pikka phase 1, and later production from Dorado oil, and PNG LNG.

What happens next

At this stage, shareholders don’t need to take any action in relation to the offer. There is no certainty that XRG will enter into a binding scheme implementation agreement, or that a transaction will proceed. We will update upon any change of circumstance.

Santos is the second-largest Australian oil and gas producer behind Woodside, and it would be a shame to see such an icon fall into foreign hands. XRG has committed to keeping Santos headquartered in Adelaide, likely a first pass at assuaging FIRB considerations. It’s not clear that this would be enough given Santos’ ownership of critical energy infrastructure.

It wouldn’t be the first time that a bid for Santos might fall short. Private equity fund Harbour Energy’s AUD 7.00 bid was rejected in 2018 as too low. Merger talks with Woodside were ended in 2024 given lack of agreement on valuation. Santos’ board appears happy on the valuation front this time around, so a regulatory intervention is likely all that stands between the loss of another storied Australian company.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.