Around 11:45 am today, there was a disturbance in the force around the Sydney CBD as investment bankers from Morgan Stanley, Citi and Goldman Sachs cried out one after WDS announced that they were walking away from talks to merge with Santos. This saw a gravy train of approx. $100 million in investment banking fees disappeared from the $57 billion merger, which is bad news for Ferrari, Swiss watch and yacht dealerships. The HNW Equity Portfolio holds a 6.1% weight to WDS, with the Income Portfolio a hefty 8%, so we were following these talks with interest and, until today, dismayed about their direction.

As discussed previously, this merger made no sense to Atlas (though very favourable to STO shareholders) due to the four reasons below;

  1. Minimal synergies – the most obvious being $100M to $200M of head office costs, which are insufficient grounds for any merger. Analysts touting WDS’s acquired experience in the Gulf of Mexico to STO’s $2.6B Pikka project in Alaska clearly failed high school geography.
  2. ACCC Issues/Regulatory Risk in WA and East Coast with WDS owns 50% of Bass Strait when combined with Santos’ Cooper Basin and Narrabri presence. The merged entity would control about 26% of Australia’s East Coast gas market and 35% of the Western Australian domestic gas market. Could see forced divestments. Governments in PNG & SA will also cause issues around head office closures.
  3. STO Inferior Assets: While the PNG LNG assets are good, STO is only a shareholder, not a 100% owner or operator. STO is seeing a steep drop-off in its West Australian gas production, declines in the Cooper Basin, and difficulty finding sufficient gas to feed GLNG. STO does not have the balance sheet to fund its growth projects and would need WDS’ cash flows to fund these. Conversely, WDS has a suite of Tier 1 assets in the Gulf of Mexico and Northwest Shelf that they own.
  4. Disrupt Management Focus – WDS only acquired the BHP petroleum assets in June 2022 and is currently executing three major projects: Sangomar in Senegal, Scarborough in Australia and Trion in Mexico. WDS does not need to be solving STO’s issues in the Timor Sea, Narrabri, Alaska and expansion in PNG.

Woodside finished up 1% to $32.60 and Santos down -5.5% to $7.44 in a victory for common sense.