Kevin Gallagher is in a race against time. A veteran of Australia's oil and gas industry, the Scotsman has earned acclaim for transforming Santos Ltd (ASX: STO) into the country’s second-largest fossil fuel producer in under a decade. Now, Gallagher must accelerate an ambitious growth strategy to cement Santos as an international contender, ranking alongside industry giants like Woodside Energy Group and Eni SpA. All this while managing impatient investors and fending off circling suitors.
Gallagher's Transformational Leadership
Gallagher joined Santos as CEO in 2016, taking over a company struggling with low oil prices, faltering shares, and project delays. His initial efforts focused on slashing drilling costs and boosting profitability from the company’s aging gas assets. These moves helped stabilize Santos, delivering consistent profits and winning investor trust.
Challenges and Investor Concerns
Despite these efforts, Santos has struggled to meet investor expectations recently. The company's share price has lagged, rising only about 8% over the past three years compared to 27% for Woodside and 83% for Exxon (NYSE:XOM). Its legacy assets in Australia have failed to impress growth-focused investors, and the company’s dividend and buyback yield has lagged behind peers. Slow progress on key new projects, including in Papua New Guinea, continues to weigh on Santos’s performance.
Gallagher’s plan to transform the company hinges on boosting production volume by over 50% by the end of 10 years. This expansion bets heavily on the region’s continued appetite for gas as it moves away from oil and coal. However, the promise of this growth has yet to translate into a revaluation, leaving Santos vulnerable to takeover attempts.
Circling Suitors and Internal Challenges
Santos has already had to rebuff multiple takeover attempts, even from Woodside (ASX: WDS), its Australian rival. More suitors have emerged, most recently Abu Dhabi National Oil Co and Saudi Aramco (TADAWUL:2222). With a A$6 million (US$4 million) "golden handcuff" agreement set to expire at the end of next year and no obvious successor in place, shareholders are beginning to wonder whether Gallagher can pull off his ambitious plans.
One priority project for Santos is Barossa. This project has been criticised for being among the dirtiest gas projects in the world. Gallagher has had to tackle challenging approvals, regulators, and third-party litigation, threatening to delay the project from its 2025 start. Without Barossa, the company cannot start production at its Darwin liquefied natural gas (LNG) plant. This plant was shut last year after an older gas field ran dry.
Meanwhile, another expansion project – an LNG export plant in Papua New Guinea – has struggled to move forward. Government negotiations and the pandemic have delayed progress, with TotalEnergies SE, which will operate the facility, pushing the final investment decision to 2025. Analysts predict this could be further delayed or scrapped altogether.
Shareholder Pressure and Strategic Decisions
An activist investor, UK-based Snowcap Research, last year criticized Santos’s aggressive upstream spending plan, demanding stronger capital discipline and better returns. Other shareholders have urged the company to split its coveted LNG assets from its oil operations in Alaska and domestic gas business in Australia to cash in on higher valuations.