Australia: $10 billion-plus Mega-merger a fix for Santos and Origin Energy

A mega-merger between Santos and Origin Energy could drive $3 billion of cost synergies and help both weather rock-bottom oil prices, according to Credit Suisse.

The deal as envisaged by the bank’s energy equities team would involve spinning off Origin’s utilities business, while the oil and gas operations would be combined to create “Soritos E&P”.

“We are struck by the beauty of both the industrial and political logic to the deal at a time when the companies are on their knees and the east coast market is staring down the barrel of an uncomfortable date with destiny,” the analysts said in a note to clients.

A zero-premium merger would be the most logical structure for combining the two companies, which are both suffering from the impact of funding large liquefied natural gas projects in Queensland just as cash flows are being hit by plunging crude oil prices, they said.

“A more open mindset to a merger could see huge synergies realised at a time when, particularly at the LNG projects, political and industrial logic is compelling to get a deal done,” the analysts led by Mark Samter said in the report.