Boss Santos Races Against Time to Build a Gas Giant

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(Bloomberg) — Kevin Gallagher is racing against time.

A veteran of Australia’s oil and gas industry, the Scot has won praise for turning Santos Ltd into the country’s second-biggest fossil fuel producer in a decade. But now Gallagher must accelerate an ambitious growth strategy that will strengthen the company as an international competitor along with Woodside Energy Group and Eni SpA – all while managing impatient investors and surrounding applicants.

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If he fails, the company’s $17 billion share price is vulnerable as one of the most sought-after targets in the sector.

With the A$6 million ($4 million) “golden handcuff” agreement set to expire at the end of next year, with no clear successor and potential new bidders already in the frame, shareholders are beginning to wonder whether the Santos boss can pull it off. .

“Investors see Gallagher as one of Australia’s best CEOs in his first five years in office,” said Saul Kavonic, energy analyst at Sydney-based MST Marquee. “But his reputation has been damaged during the second half, as Santos sent several downgrades. He was unable to fulfill all the promises he sold to the market, and the value of the acquisitions he made began to look more doubtful.

Gallagher’s plan to turn Santos around depends on boosting production volumes by more than 50% by the end of the decade, which gives the company one of the strongest growth pipelines in Asia Pacific, according to Neil Beveridge, senior analyst at Sanford C. Bernstein & Co. Expansion bets heavily on appetite continue the area for gas because the edge is far from oil and coal.

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But that promise has yet to translate into a re-evaluation, given Santos’ continued achievements. The stock was up about 8% over the three years to the end of June – compared with 27% for Woodside and 83% for Exxon. Legacy assets in Australia failed to impress investors looking for growth, dividends and buyback yields have lagged, while slow progress in key new projects, including in Papua New Guinea, continues to consider.

The result was that Santos had to fend off several takeover attempts, including from Australian rival Woodside. More suitors have emerged, most recently Abu Dhabi National Oil Co and Saudi Aramco, according to people familiar with the matter.

“We’re very frustrated with our share price,” Gallagher told investors in November, recognizing that the company has become an attractive quarry for predatory competitors.

Now, Gallagher is holding the company, analysts and industry executives say.

“Santos does not need this transaction,” he said in an internal video to staff from December, referring to talks with Woodside, which later broke down. “We have a strong underlying business and that is why there is interest in us.”

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Santos did not respond to a request for comment.

The first drilling engineer to come to Australia to work for Woodside after working in the North Sea, Gallagher took over as chief executive officer of Santos in 2016 after leading Clough Ltd., an engineering company. He came to the company in the doldrums, struggling to cope with the drop in oil prices, faltering shares and project delays.

Gallagher reduced drilling costs and increased profitability from the company’s aging gas assets. This allows oil and gas producers to better deal with the ebbs and flows of the energy market, generating more consistent profits that earn the confidence of investors.

They are targeting expansion through acquisitions – first with producer Quadrant Energy in 2018, and then acquiring Papua-focused Oil Search Ltd in 2021.

So, when Gallagher was considered the top job at Woodside that year, Santos’ board of directors agreed to a bonus deal to tie him in until the end of 2025. But that deadline is now approaching – and growth has hit a snag.

One of the priority projects for Santos is the Barossa, which has been criticized for being one of the world’s dirtiest gas projects. Gallagher has to deal with challenging third-party approvals, regulators and courts, which threaten to delay the project from the start of 2025. Without the Barossa, Santos cannot resume production at the Darwin LNG plant, which closed last year after an old gas field dried up.

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Meanwhile, another – an expansion to an existing LNG export plant – has struggled to move forward. Papuan facilities were destroyed by government negotiations, then the pandemic. TotalEnergies SE, which will operate the facility, has postponed a final investment decision until 2025, and analysts predict that this could be pushed back – or canceled altogether.

Activist investor, UK-based Snowcap Research, last year criticized the company’s aggressive upstream spending plans. It demands rather strong capital discipline and more returns. Other shareholders have called for the company to separate its coveted LNG assets from its oil operations in Alaska and its domestic gas business in Australia to achieve a higher valuation.

“We’d like to see a commitment to return more healthy and powerful capital from the company,” Snowcap co-founder Henry Kinnersley said via email, adding that after meeting Gallagher, the outfit was encouraged in discipline, but saw what else to do.

Gallagher doesn’t have to leave the company when his bonus deal expires next year, and he could stay. With no clear successor in place, the decision to move on will certainly expose Santos. Stay will raise the stakes in the delivery.

“Maybe Kevin wants to see the plan,” said Bernstein’s Beveridge. “We’re still in the middle of this plan. Execution is really important.”

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