Match made in Energy Heaven! Brokers weigh in on Woodside - Santos merger

What started as a rumour has now been confirmed. Woodside Energy (ASX: WDS) and Santos (ASX: STO) are officially in “discussions regarding a potential merger”.

Before we get too excited about the prospect of an approximately $80 billion energy juggernaut, we should remember that it’s still early days in the process, and in the words of the two companies: “there is no certainty that the discussions will lead to a transaction”.

But it is a tantalising prospect! The combination of the two biggest ASX-listed energy companies would put it among the biggest in the world, possibly somewhere between BP (8th-largest) and Schlumberger (11th-largest). Additionally, the synergies across the two companies are expected to be substantial.

Needless to say, the big brokers have weighed in on the possible tie up today. Here’s a summary of their respective views:

JP Morgan

• Merger could have ramifications for energy sector as could trigger increased M&A activity

• Synergies likely constrained by fact there is actually limited overlap between two businesses

• Merged entity would have attractive scale and reach given quality assets and jurisdictions

• ACCC may not green light deal unless some divestments are made, and this could impact the attractiveness of the merged entity

Macquarie

• If the merger doesn’t eventuate, there could be longer lasting scrutiny on Santos as a potential takeover target

• Woodside has some valuable experience in taking on new assets (e.g., recent acquisition of BHP’s energy assets)

• Woodside may need to offer a premium for Santos to get the deal over the line, perhaps in the order of magnitude of 30% above the last price prior to the announcement, an all scrip offer is the logical option

• The deal is unlikely to be blocked by the ACCC, but some divestments are likely

UBS

• A 20-30% premium to Santos 7 December closing price ($8.20-$8.88) would be required, giving Santos shareholders 0.273-0.296 Woodside shares

• The merged company would “create a giant” in the APAC region with respect to LNG (greater than 70% in product mix), and it would have a “well diversified asset base”

• Synergies could be $150-$300 million (“$200 million base case”)

• EPS accretive from the first year, free cash flow accretive from 2027

• ACCC would likely scrutinise east coast assets, divestments are a “key risk” as could “drag on merger economics”

• Santos appears undervalued, and for deal to proceed, Woodside must “pay up for that value” – the prospect of this not occurring is the “biggest risk” to deal not proceeding

• The dividend yield of the combined entity would likely decline to around an average of 5% p.a. until 2026, afterwhich EPS accretion from the merger and lower capex will push it up to over 7.5% p.a. by the end of the decade.

Combined Woodside and Santos pro-forma DPS and Dividend Yield Outlook. Source: UBS