Big Oil’s old profligacy lives on Down Under

A man works at the Santos infill gas drilling rig outside Moomba, South Australia May 17, 2012. Confidence in Australia's coal seam gas industry, one of the nation's brightest economic prospects, has begun to flicker. For the first time since energy firms kicked off $50 billion of projects to drill for gas in the region's rich coal deposits less than two years ago, there is a consensus emerging among industry executives and experts that plans are well off track. Picture taken May 17, 2012

MELBOURNE, March 15 (Reuters Breakingviews) - Fossil-fuel drillers have adopted a common mantra in recent years: keep shareholders happy with dividends and invest only in shorter-term projects. Sure, Ukraine war-related windfalls did convince oil majors like Chevron (CVX.N), Exxon Mobil (XOM.N) and BP (BP.L) to push the investment boat out a bit, but they are still sharing plenty of lucre with their investors. Australia’s Santos (STO.AX), though, is doing the opposite – and suffering for it.

Shares in the $16 billion oil and gas producer run by Kevin Gallagher have fallen 3% over the past two years even as local rival Woodside Energy (WDS.AX) has risen 30% and larger peers Shell (SHEL.L), Exxon and BP more than 50%. Throw in dividends and Santos shareholders have received a measly 6% total return during that period. Such extraordinary underperformance has finally drawn an activist in the form of London-based Snowcap Research.

Santos’ 15% return on capital employed last year puts it at the bottom of the class; BP delivered almost 25%. It looks slated to stay in the basement, with analysts projecting a sub-8% return for 2025, per Refinitiv data. The company plans to throw over four fifths of its operating cashflow into capital expenditure over the next three years, Snowcap points out, whereas most peers are targeting between 30% and 60%. Meanwhile, Gallagher has allocated a measly 13% of cashflow to dividends and buybacks, less than half the industry average. Snowcap argues the target’s market value could increase by as much as 50% if executives dialled back its “misguided” growth plans, returned more money to shareholders and changed executive incentives.

Santos might defend itself by pointing to its industry-leading 146% total return since Gallagher took the helm seven years ago, and a knack for cost-cutting. Yet the $6 million one-off incentive package he was offered in 2021 raises questions. The bonus is mostly tied to successful “growth projects”, which arguably encourages him to overinvest. The rest is tied to climate solutions including carbon capture and storage projects which the company doesn’t envisage being useful until after 2030. Later this year Santos will have to defend itself in federal court against accusations of greenwashing by the Australasian Centre for Corporate Responsibility.

More than a quarter of shareholders voted against the company’s executive pay package last year. If that happens again at next month’s annual meeting, it would, under Australian rules, allow investors to boot the entire board. That’s a lot of dry powder to leave around for activists to light.

Australia's Santos has underperformed all its main peers

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


Activist investment firm Snowcap Research on March 9 said Australian oil and gas company Santos' market value could increase up to 50% if executives dialled back its “aggressive…misguided” growth plans, returned more capital to shareholders and changed executive incentives.

The London-based firm also called Santos’ safety and environmental performance “unacceptable” and said it is ignoring energy transition risks.

On the same day Market Forces, an affiliate of Friends of the Earth Australia, said it has filed a formal statement on behalf of more than 100 investors urging all Santos shareholders to vote against its remuneration report at its annual general meeting on April 28. The group said Santos’ pay structure is “inconsistent with the company’s claimed support for the climate goals of the Paris Agreement”.

Editing by Pete Sweeney and Thomas Shum

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