Santos and Woodside after market hours on Thursday confirmed speculation they were in preliminary talks to create a major oil and gas company, with assets in Australia, Alaska, the Gulf of Mexico, Papua New Guinea, Senegal and Trinidad and Tobago.
Santos shares jumped 10.8% to A$7.57 in early trade, their highest level since Nov. 3, while Woodside Energy shares slipped 1.3% to A$29.59 in early trade, with investors wary of the merger economics and potential competition hurdles.
A deal would extend the recent consolidation in the Australian oil and gas sector. Woodside just last year combined with BHP Group's (BHP.AX) oil and gas business, while Santos acquired Oil Search in 2021.
"Effectively the market is shrinking from four to one in the space of 18 months, that is a dramatic consolidation," said Tim Buckley, a director at think tank Climate Energy Finance.
"It's a dramatic concentration of control. But I would emphasize it's coming from a point of weakness. It's coming from a point of ongoing massive underperformance."
Ahead of Thursday's announcement, Woodside shares were down 15% and Santos shares were down 4% so far this year, against a 2% gain in the S&P/ASX200 index (.AXJO).
Analysts say a potential tie up with Woodside would prompt close scrutiny from the Australian Competition and Consumer Commission (ACCC).
"While we would expect the ACCC to look at the impact on domestic gas supply, the state with the biggest overlap is in Western Australia, where the merged company would supply about 35% of the domestic market," said Jarden analyst Nik Burns.
"We don't see similar issues in the east coast gas market."
The ACCC said on Thursday it would consider if a public merger review into the impact on competition was required if the deal goes ahead.
The regulator has taken an increasingly tough stance on mergers in sectors where competition is already highly concentrated.
UBS analysts estimate a merged Woodside and Santos could create up to $300 million in synergies a year but it was likely some domestic asset divestments could be needed to appease the competition regulator.
"If assets must be disposed but the market will only pay well below book value, it could weigh on merger economics," UBS analyst Tom Allen said in a note.
