Australian oil and gas operator Santos has improved the proposed terms of a potential all-share merger with Papua New Guinea's Oil Search, which said it considers the offer to be acceptable.

The improved offer would see Santos acquire all of the shares in Oil Search for 0.6275 new Santos shares for each Oil Search share via a scheme of arrangement. This compares to the previous offer on 25 June 2021 of 0.589 new Santos shares for each Oil Search share.

The two companies said today that under the revised offer, Oil Search shareholders will own 38.5% of the merged company compared to 36.9% under Santos' first proposal.

The new offer implies a transaction price of A$4.52 per Oil Search share, based on the closing price of Santos shares on 24 June 2021 (the day prior to when Santos submitted its earlier proposal), which represents a 19.7% premium to the closing price of Oil Search's shares on that date.

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In the last 52 weeks, Oil Search shares have traded at between A$2.50 and $4.62 on the Australian bourse. Santos has ranged between A$4.64 and A$7.84.

Both companies will now conduct a due diligence process that will take about four weeks, which could be followed by entry into a merger implementation agreement.

Oil Search said its board intends to unanimously recommend that shareholders vote in favour of the new offer, in the absence of a superior proposal and subject to the conclusion of an independent expert that the offer is in the best interests of Oil Search's shareholders.

"The Oil Search board believes that the revised proposal presents Oil Search shareholders with an opportunity to maintain ongoing exposure to Oil Search's portfolio of world-class assets as part of a merged group for which there is strategic logic. The merged group would be within the S&P ASX-20 index and amongst the top 20 largest global oil and gas companies," said the PNG company.

Oil Search is the operator of all PNG's producing oilfields, but Santos has a significant business in PNG too; the pair are co-owners of the PNG LNG asset, and part owners the proposed P'nyang development.

The potential merger represents a compelling combination of two industry leaders to create an unrivalled regional champion of size and scale with a unique diversified portfolio of long-life, low-cost oil and gas assets

Santos CEO Kevin Gallagher

The combination of the two will also be a boost for the planned Papua LNG development.

Santos chief executive Kevin Gallagher said the potential merger “represents a compelling combination of two industry leaders to create an unrivalled regional champion of size and scale with a unique diversified portfolio of long-life, low-cost oil and gas assets".

“The merged company would have strong cash generation from a diverse range of assets which provides a strong platform for sustainable growth and continued shareholder returns."

Santos said the potential merger will create a company with the following features:

⦁ diversified portfolio of high quality, long-life, low-cost assets across Australia, Timor-Leste, Papua New Guinea and Alaksa;

⦁ pro-forma market capitalisation of A$21 billion;

⦁ combined 2021 production of 116 million barrels of oil equivalent

⦁ combined 2P and 2C resource base of 4.9 billion barrels of oil equivalent

⦁ investment grade balance sheet with more than US$5.5 billion of liquidity to self-fund development projects;

⦁ target gearing of less than 30%

Wood Mackenzie research director Andrew Harwood responded positively to the merger proposal.

"Overlapping interests in PNG, a strengthened financial platform and the potential for further portfolio synergies and optimisation provide strong strategic rationale for the merger."

"Combining with Oil Search would immediately increase Santos' production by over one-third, to around 290,000 boe per day. The impact of Oil Search’s portfolio becomes more pronounced by the middle of the decade when it would contribute over half of growth to the combined production output," he added.