Santos and Woodside, two major Australian oil and gas producers, confirmed last night they are in discussions regarding a possible merger.

The impact on transition will be influenced by how the merged company choses to deploy capital. If it can realise synergies, we see risks from using capital to expand greenfield oil and gas, and benefit if it is used to establish a meaningful low carbon proposition for customers.

Key findings

• The proposed merger would result in a company with a market capitalisation of US$52bn, equal to European oil and gas major Eni, but with less than half the oil and gas production at ~260 Mboe, around half the profit, and without Eni’s diversification and progressive emissions reduction targets.

• Combining the current guidance for a potential Merge Co. (proposed Santos and Woodside), oil and gas production could increase 21% between FY22-FY28 to ~314 Mboe.

• Both companies share the same FY30 Scope 1 and 2 emission targets but lack targets to reduce scope 3 and net carbon intensity (lifecycle emissions).

• Santos has no capex for transition versus Woodside which has an ambition for US$5bn by FY30, of which only a small fraction has been deployed to date.

In our view, a proposed merger would create a larger company, but on a global scale would continue to sit poorly on transition. We don’t see a material change to a combined companies emissions outlook.