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  • Santos’ (STO) planned merger with Oil Search (OSH) may have provided an opportunity for small players within the energy industry
  • STO’s acquisition bid signals the energy market has begun its recovery from months of instability related to COVID-19 and OPEC infighting
  • One of the juniors feeling confident is Metgasco (MEL), which has interests in oil and gas projects across Australia, including near Santos
  • MEL says the merger, as well as the Government’s push for more energy companies on the East Coast, means FY22 is shaping up to be positive
  • Shares in Metgasco are trading at 2.5 cents each in a $13.2 million market cap

Energy giant Santos’ (STO) planned merger with Oil Search (OSH) may have provided an opportunity for small players within the energy industry.

STO’s acquisition bid signals the energy market has well and truly begun its recovery from months of instability related to COVID-19 and OPEC infighting.

It also indicates that Santos may be looking to snap up other energy businesses in the future, especially if they have assets nearby their own, as OSH did.

Among the small-caps feeling optimistic was ASX-lister Metgasco (MEL), which has oil and gas projects across Australia.

MEL said given the merger, as well as the Government’s push for more energy companies on the East Coast, FY22 may be a more positive year for the sector.

Tumultuous past

Both the COVID-19 pandemic and protracted infighting amongst members of the OPEC cartel have contributed to a tumultuous 18-month period within the oil and gas sector.

When the pandemic hit and airlines across the globe ground to a halt, oil production rates were slashed and prices plummeted to below $30 a barrel.

Combined with disagreements about cutting oil production and tension between Russia, Saudi Arabia and the UAE, prices became so bad that some producers had to pay to have their oil taken.

Since then, concerns surrounding the pandemic have begun to subside due to vaccines, and some resolutions have been reached within the cartel, helping prices make a return to pre-COVID-19 levels.

Another factor that has been consistently affecting the oil and gas industry within Australia is the Federal Government’s policy decisions.

Big Stick Legisaltion, a gas-led recovery from COVID-19, and a push to accept fossil fuels as the building blocks for the country’s renewable energy future have all dominated the Morrison Government’s approach to the industry.

The Prime Minister has even committed to building a new power plant in NSW, the Hunter Power Project by Snowy Hydro, after AGL Energy (AGL) pushed ahead with long-foretold plans to close Liddell Coal Fired Power Station by 2023.

When Liddell alone goes offline, up to 13 per cent of NSW’s electricity supply would be lost under initial estimates, creating a production gap in an already struggling market.

The merger

With these factors in mind came Santos’ confirmation last month that it was re-entering the merger and acquisitions game.

The energy giant ended months of speculation when it announced on July 20 that it had made an offer to buy fellow energy giant Oil Search.

STO offered to buy the business, which has assets in Papua New Guinea and Alaska, for $4.25 per share.

However, Oil Search knocked back the offer stating it “did not offer appropriate value for Oil Search shareholders or a basis on which discussions could be progressed”.

Despite the rejection, Santos remained intent on acquiring the business as the merger was “a logical combination of two industry leaders to create an unrivalled regional champion of size and scale”.

STO tabled its second offer in August — offering $4.52 per share — a 19.7 per cent premium to OSH’s last traded price, with Oil Search to own 38.5 per cent of the combined entity.

The higher price was enough to get OSH to announce its intention to support the merger — with due diligence now underway by Santos.

Once completed, both businesses would become a merged $22 billion company and instantly one of the top 20 largest energy companies worldwide.

Juniors set to benefit

For Metgasco, the merger offers a range of benefits.

The company has licence interests in several projects located in the Perth Basin as well as the Copper and Eromanga Basins of Queensland and South Australia.

Its assets in the Cooper Basin lie near Santos’ own project in the region, with MEL and the other joint venture partners due to negotiate with STO about using its Moomba infrastructure.

Metgasco and the JV partners have had 100 per cent success rate in discovering gas, drilling three exploration wells at the Vali gas fields throughout the last 18 months.

Vali-2 delivered 150 metres of net gas pay in the Toolachee and Patchawarra formations, while Vali-1 also confirmed gas pay in the Patchawarra.

The nearby Odin-1 well, a separate tenement MEL has a stake in, produced similarly strong results including 172.5 metres of net gas pay in the Toolachee, Patchawarra and Epsilon formations.

A final investment decision will be made on developing this new gas production hub at Vali and Odin by the end of the year.

Mr Aitken said he was confident production could begin by mid-2022, giving the East Coast access to much-needed new gas supply.

“The Vali and Odin field reserves have a more than 20-year field life,” Mr Aitken said.

“Considering the anticipated gas shortage, as demand outstrips supply, our assets in the Cooper Basin are incredibly important.”

Mr Aitken added that the Santos and Oil Search merger created a major company with more international assets and they may divert exploration and development capital investments overseas.

“In my view, Santos getting bigger via the Oil Search acquisition could reduce their planned exploration and investment in the East Coast, which may offer the opportunity for MEL to increase their licence footprint in the Cooper/Eromanga basin,” Mr Aitken said.

“A reduced investment would in turn increase the gas price for those states, which would only compound the need for smaller explorers such as MEL and others.”

Shares in Metgasco were trading at 2.5 cents each in a $13.2 million market cap.

MEL by the numbers
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