Santos and the XRG bid consortium could not find common ground on a series of key issues during the due diligence process, according to two sources familiar with the matter.

In particular, their views differed around risks in relation to certain assets, valuation expectations and the timing of the shareholder vote, the sources said.

They were speaking following news that the bidder has walked away from its indicative takeover proposal for the Australian oil and gas company at USD 5.76 per share (worth AUD 8.89 per share at the time of the June announcement).

Santos confirmed earlier today (18 September) that the consortium, which was led by Abu Dhabi National Oil Company (Adnoc) subsidiary XRG and also included Carlyle, had the previous evening notified the board of its decision to withdraw its indicative proposal. The notification came just two days before the deadline of the extended due diligence period.

In its own announcement, XRG said “a combination of factors, when considered collectively, have impacted the Consortium’s assessment of its indicative offer”.

The first source familiar with the situation said XRG’s decision is “purely commercial” and due to issues revealed in the due diligence process, rather than concerns about regulatory approval or shareholder approval.

Those issues include Santos’ reluctance to disclose key information in a timely manner – for example, Santos only informed the consortium about the capital gains tax toward the end of the due diligence process, the source noted. There was also a leak in the Darwin LNG storage facility, adding environmental and commercial risk, the source said.

The second source echoed that the two parties could not agree on the capital gains tax to be withheld in Papua New Guinea but also pointed to a divergence of views around regulatory commitment to invest in domestic gas development, and the timing of the Santos shareholder vote.

XRG insisted on having the shareholder vote before obtaining regulatory approvals, while Santos believed the risk of obtaining regulatory approvals should rest with the bidders, not the shareholders, the second source said.

According to the first source, regulatory approvals, including from Australia’s Foreign Investment Review Board (FIRB), were not a factor in making the decision to withdraw. The consortium has had positive engagement with regulators, including FIRB, the source said. Shareholders, including L1 Capital, have also been supportive of the deal, this source added.

What is looming large here, said a sector banker familiar with Santos and the oil & gas sector, is that Santos may have underestimated its decommissioning liabilities, and bidders in the due diligence process could have different views.

However, the second source said that decommissioning costs were factored into Santos’ cash flows and balance sheets, and there were no surprises for stakeholders.

Both the first source and the sector banker noted that Santos may have had unrealistic expectations for what the bidder would pay.

The second source, meanwhile, argued that the XRG consortium might not have properly assessed the risks and understood the intricacies of gas production, which may have hindered its ability to effectively negotiate and complete the transaction.

What’s ahead?

XRG is still keen to invest in Australia’s energy sector and will continue to evaluate opportunities, the first source said.

As for Santos, its shareholders will demand answers about the board and management’s track record of handling takeover situations, as well as the company’s future strategy, the sector banker said.

According to the second source, the Santos board is supportive of the CEO and management. But the company faces significant decisions in the next six months, including the final investment decision (FID) on Papua LNG and a potential extension of Pika Phase One, all of which will require careful consideration of capital expenditure and risk, the source noted.

Santos’ shares closed 11.9% lower at AUD 6.74 today on the back of XRG’s withdrawal.

XRG and Santos declined to comment beyond their public statements.