Why Santos was always a Risky Target - Leak or No Leak

The Darwin LNG leak made for a juicy headline [1]. But leaks don’t sink deals on their own — fundamentals do. And when you look past the drama, Santos was never a prize worth chasing. From cash flows that vanish, to a balance sheet built on dilution, to risky mega-projects, the cracks were already there. Here are four reasons why.

1. Cash Flow That Doesn’t Stick

Category: Financial Performance

On the surface, Santos looks like a strong cash generator. From 2016 to 2025 H1, operating cash flow rose from $857m to a peak of $4.6bn in 2022, before sliding back to $1.6bn in 2025 H1. Here’s the problem: very little of that cash actually stayed on the balance sheet.

Heavy capital expenditure chewed through operating cash every single year, with investment outflows averaging more than $1.6bn annually. Financing flows swung wildly - raising money in some years, paying it back in others - making the company appear more dependent on capital markets than on disciplined self-funding.

The result? Across 10 reporting periods, Santos increased its cash balance in only four years. Most of the time, it ended the year with less cash than it started with. For an acquirer, that signals a business that can produce cash but struggles to convert it into durable financial strength.

2. Balance Sheet Strength Built on Dilution

Category: Capital Structure / Financing Strategy

Santos’s gearing ratio looks healthier today, falling from 33% in 2016 to 24% in 2024. The story underneath, however, is far less flattering. Net debt remained stubborn, climbing as high as $5.2bn in 2021 and sitting near $4.9bn in 2024.

The real driver of the lower gearing ratio wasn’t debt reduction. It was a surge in equity. Net equity more than doubled over the period, largely thanks to share issuances to support capital expenditure and acquisitions (e.g. Oil Search at the end of 2021). The share count exploded from 1.8bn in 2016 to over 3.3bn in 2022, heavily diluting existing shareholders.

In other words, Santos didn’t deleverage through discipline. It simply leaned on investors to paper over its debt problem. For an acquirer, that’s a red flag: balance sheet “strength” that rests on dilution rather than sustainable cash generation.

3. Big Deals, Bigger Commitments and Execution Risk

Category: Operational Sustainability

Santos has not only been an operator. It has been an acquisitive, project-heavy company since 2016. Those deals and the projects they brought in substantially increased capital commitments and integration risk, leaving the company more exposed to delivery delays, cost overruns and commodity cycles.

Major acquisitions since 2016

• Quadrant Energy (2018): Santos completed the purchase of Quadrant Energy (bringing assets including an 80% stake in the Dorado discovery), expanding its offshore liquids exposure [2]

• ConocoPhillips’ northern Australia & Timor-Leste assets (completed May 2020): This deal increased Santos’ interest in Bayu-Undan and Darwin LNG (and brought Barossa into Santos’ asset base), adding ageing offshore infrastructure and the need to fund back-fill projects [3].

• Oil Search (merger implemented Dec 2021): The Oil Search merger enlarged Santos’ PNG footprint and added significant upstream projects (including stakes related to Alaska opportunities via subsequent portfolio moves) [4]

High-commitment projects tied to those deals

• Barossa (Darwin LNG backfill): Santos took FID on Barossa in March 2021 to replace Bayu-Undan feedstock for Darwin LNG. This is a multi-billion dollar, technically complex project with high CO₂ content and notable regulatory and community scrutiny. Delays, approvals and emissions controversy have remained persistent project risks [5, 6, 7, 8, 9].

• Dorado (Bedout Basin): Acquired via Quadrant, Dorado is a large liquids project that has faced postponements and is capital intensive; Santos deferred decisions on Dorado as it prioritised other projects and shareholder returns. That postponement highlights the optionality and funding strain around large FIDs. [10, 11]

• Pikka (Alaska) and other North America projects: Through the Oil Search merger and subsequent development activity, Santos is advancing the Pikka project in Alaska, which is another big, long-lead, high-cost development that requires sustained capital and carries geopolitical/community complexity [12, 13, 14, 15. 16].

Why this weakens operational sustainability

These acquisitions and project commitments turned Santos into a capital-intensive developer, where generating cash alone is not enough to cover multi-billion-dollar FIDs and complex offshore tie-ins. Integration and execution risk also increased, as absorbing Quadrant and Oil Search assets stretched management bandwidth and created timing mismatches between cash inflows and heavy capex outflows. On top of that, project delays and controversial approvals - most notably Barossa and Dorado - proved that even “company-making” developments can be deferred or tied up in legal and regulatory hurdles, undermining the near-term growth story that potential acquirers might have banked on.

4. Faltering Oil & Gas Prospects in Australia

Category: Macro / Industry Prospects

Australia’s domestic oil and gas outlook is looking bleaker by the year. Crude and condensate production is in decline. Forecasts show output slipping from ~253,000 barrels/day in 2024 - 25 to ~231,000 barrels/day in 2025 - 26 while, export earnings from oil are expected to plunge from AUD 12.6 billion to AUD 8.7 billion [17]. LNG revenues, once a crown jewel, are projected to slide from around AUD 72 billion in 2023 - 24 to the high 50s or low 60s in the near term [18]. Exploration activity has collapsed: oil and gas exploration is down 64% over the past decade and domestic gas demand has fallen by almost 30% in parts of eastern Australia over a decade [19, 20]. All this is happening just as government posture is tightening: new policies demand gas projects reserve output for domestic markets, while regulatory reforms are imposing stricter environmental, safety, and decommissioning rules [21, 22]. Even major projects like the North West Shelf are only being extended under tighter conditions and heightened scrutiny over emissions. For any acquirer, Santos would be entering a resource sector under multiple pressures where volume, revenue, and political support are each under threat.

Conclusion

The leak may have grabbed headlines, but it wasn’t the real story. Santos was always a shaky takeover target characterized by cash that slips through its fingers, a balance sheet propped up by dilution, a project book heavy on risk, and a domestic sector running out of gas in every sense. Any bidder would be buying into a treadmill, not a growth story.

References

[1] Robertson, Josh; Slezak, Michael and Heathcote, Angela (2025). “The inside story of an ABC report that helped scuttle Australia's biggest foreign takeover.” ABC News, 19 September 2025.

[2] Santos (2018) “Santos completes acquisition of Quadrant Energy.”

[3] Santos (2020) “Santos completes ConocoPhillips northern Australia acquisition.”

[4] Santos (2021) “Merger of Santos and Oil Search implemented.”

[5] Fitzgerald, Daniel (2021). “'A carbon dioxide emissions factory': New $4.7b gas field may release more CO2 than LNG, says report.” ABC News, 23 June 2021.

[6] Breen, Jacqueline, and Dick, Samantha (2022). “'A huge victory': Traditional owners win court challenge against $4.7b Santos gas project.” ABC News, 20 September 2022.

[7] NOPSEMA (2024). “Acceptance of Barossa Development Drilling and Completions Environment Plan.” NOPSEMA, 4 January 2024.

[8] NOPSEMA (2021). “Industry Environment Plans”.

[9] Cox, Lisa (2025). “Santos wins final approval for Barossa gas project as environment advocates condemn 'climate bomb.'” The Guardian, 22 April 2025.

[10] Whitfield, Stephen (2018). “Santos Acquires Quadrant Energy, Takes Ownership of Dorado.” Journal of Petroleum Technology, 6 9 2018.

[11] Chatterjee, Rishav, and Janane Venkatraman (2025). “Santos delays Dorado oil and gas project decision; partner Carnarvon shares tumble 23%.” Reuters, 20 January 2025.

[12] Santos (2024) “North America.”

[13] Battersby, Amanda (2024). “Santos busts the budget in Alaska.” Upstream Online, 17 10 2024.

[14] Santos (2022). “Santos announces Pikka FID and net-zero project plans.”

[15] Alaska Business (2022). “Santos Advances Pikka Project on the North Slope.”

[16] Wybieracki, Jennifer (2025). “As Oil Flows, An Arctic Village Adapts.” Native News Online, 2025.

[17] Australian Department of Industry, Science and Resources (2024). “Resources and energy quarterly: September 2024.”

[18] Australian Department of Industry, Science and Resources (2024). “Resources and energy quarterly: December 2024.”

[19] Runciman, Josh (2025). “Slump in eastern Australia gas demand shows no signs of easing.” IEEFA, 11 September 2025.

[20] Australian Petroleum Production & Exploration Association (2023). “Key Statistics 2023.”

[21] “Joint media release: Gas market review to strengthen domestic supply | Ministers.” Ministers, 30 June 2025.

[22] Lowrey, Tom (2025). “New gas projects need to deliver gas to Australians, argues minister.” ABC News, 30 June 2025.