Santos shares dumped as XRG abandons takeover: What should shareholders do next?

Santos (ASX: STO) investors were dealt a heavy blow this morning after energy giant XRG – a consortium led by Abu Dhabi National Oil Company (ADNOC) and Carlyle – walked away from its proposed $36 billion takeover bid of the company. The shock withdrawal sent Santos shares tumbling more than 10% in early ASX trade, wiping billions off its market value.

The decision ends months of speculation over whether one of Australia’s largest energy companies would fall into foreign hands, and leaves shareholders questioning the company’s next chapter. 

Let’s investigate what happened, why, and what Santos’s shareholders should be thinking about next.

Why the deal collapsed

The XRG consortium said its decision was based on a “combination of factors,” and that it had not uncovered any issues during due diligence. Instead, the collapse of the deal stemmed from disagreements over the terms of a binding deal.

According to Santos’s ASX announcement, the consortium was unwilling to accept an allocation of risk that would protect shareholder value, particularly around regulatory approvals and commitments to domestic gas supply.

The consortium stressed it still holds a positive view of Santos’s assets and management team, but the collapse underscores the challenges in executing mega cross-border deals. XRG is also grappling with delays and regulatory hurdles in Europe over its attempted takeover of German chemical producer Covestro.

Market scepticism had been simmering since the bid’s announcement in June. Shares had consistently traded well below the proposed offer price of $8.89, a sign that investors doubted the deal would reach completion due to a substantially high Foreign Investment Board (FIRB) approval hurdle.

At the time of writing, shares in Santos are now trading around $6.80, even lower than the $6.96 closing price from the day before XRG’s takeover bid was announced.

Implications for Santos management

The aborted takeover will likely increase scrutiny on Santos’s management as despite the official rhetoric from the two companies, investors will inevitably speculate that XRG may have uncovered issues during due diligence.

Santos has already endured a string of corporate false starts in recent years – notably a failed merger with the ASX’s largest energy company Woodside Energy (ASX: WDS). This latest deal failure reinforces doubts about whether the company can continue in its current form, or whether it must seek alternative strategies to unlock value.

On this point, Santos Chair Keith Spence insisted the company has the right ingredients to deliver long-term returns. “Our strategy is clear: generate cash, reward shareholders, reinvest to backfill and sustain our infrastructure, and build and grow our production, while continuing to operate safely and reliably,” he said in today’s ASX announcement

What the brokers are saying

Jarden has reacted swiftly, downgrading Santos to “underweight” from “overweight,” citing uncertainty over valuation in the absence of a corporate premium.

Australian investment bank Evans & Partners (E&P) took a more measured stance in their post-news analysis, noting: “Another failed transaction creates doubt in the market… It’s unlikely Santos remains in its current form in time with investors and management looking for alternative ways to create value”.

Despite the bruising day, Santos still has levers to pull. E&P noted the company’s free cash flow is set for a significant inflection over the next 12 months, particularly as projects such as Barossa in Northern Australia and Pikka in Alaska ramp up. PNG gas developments (Angore, Juha, P’nyang) add further growth options.

“Once the dust settles, it is likely an interesting opportunity may be forming.” E&P concluded, but retained its “neutral” rating on the stock.

What shareholders and potential investors should consider

In the short term, investors face the sting of a collapsed takeover premium and renewed volatility. The withdrawal will test their patience, particularly considering the compound annual return the company has delivered to shareholders over the last 5 years is around 5.6% p.a. – approximately half that of the broader S&P/ASX 200.

For longer-term investors, today’s slump could also mark the beginning of a new value opportunity should Santos deliver on its project pipeline. For short-term traders, perhaps there’s a quick turn on offer once the initial disappointment of the takeover withdrawal subsides. To buy the dip, or not to? 🤔

To answer this question, both investors and traders will want clarity from management in the coming weeks on how it intends to repair confidence and unlock value without a corporate suitor. Options could include asset sales, joint ventures, or stepped-up capital returns. Analysts will also scrutinise whether Santos can execute growth projects on budget and on time – a critical factor in justifying its standalone strategy.