Santos survives a collapsed ADNOC takeover to enter a cash-harvesting phase

A non-binding US$5.76-a-share takeover proposal from an Abu Dhabi-led consortium briefly validated fund managers' view that Santos was undervalued, and its collapse over tax and regulatory terms has left the company to prove the same case on its own, powered by first gas from Barossa.

3 Jul 2026 · 6 min read

Santos Ltd (ASX: STO) spent mid-2025 as the subject of one of the year's most closely watched takeover sagas, before the deal's collapse left fund managers to reassess whether the underlying business could deliver the same value on its own. L1 Capital described the initial approach in July 2025, a non-binding, indicative cash proposal from an ADNOC-led consortium worth US$5.76 per share (A$8.89/sh), representing a 28% premium to the pre-offer price, which the fund said validated its thesis that Santos's asset base was materially undervalued by the market.

The takeover proposal supports our underlying thesis that Santos' asset base is materially undervalued by the market... regardless of the ultimate outcome of the takeover proposal, we believe Santos remains well positioned to deliver attractive returns for investors.

L1 Capital, Monthly Report, July 2025

The deal unravels over tax and regulatory terms

The consortium's binding offer never materialised. Firetrail Investments reported in August 2025 that the XRG-led bidding group was unable to make a binding bid within its initial timeframe, though it noted due diligence had not turned up issues so far. That optimism proved short-lived. Ellerston Capital detailed the collapse in September 2025, reporting the XRG-led consortium withdrew its offer after disagreement over Scheme Implementation Agreement terms, with Santos reportedly unwilling to accept the risk allocation and shareholder protections XRG proposed, while conflicting reports suggested Santos wanted the consortium to bear potential Papua New Guinea capital gains tax and withholding tax liabilities and to delay the shareholder vote until after FIRB approval. L1 Capital added that the parties could not agree on several key commercial terms after multiple extensions of the exclusivity period, with the deal's structure, deducting all dividends from the cash offer price, coming under particular scrutiny.

A warning about betting on big deals

Harvest Lane Asset Management drew a broader lesson from the episode, arguing bigger takeover deals typically carry larger, not smaller, risks despite investor perceptions to the contrary. The fund said the ADNOC consortium's conditionality and regulatory hurdles made the deal far from investable from its mandate's perspective from the start, and that the roughly 16% share price drop on the pull-out was a clear warning to those who had been betting, or hoping, for a successful outcome.

As a big generalisation the smaller deals almost inherently come with less regulatory and stakeholder risk... the 16% drop in price this month is a warning to those that were betting (or hoping) for success.

Harvest Lane Asset Management, Monthly Report, August 2025

First gas from Barossa keeps the standalone case intact

With the takeover off the table, fund managers turned back to Santos's own operating momentum. Pendal Group noted the company produced first gas flows from its Barossa field in September 2025, underpinning an outlook for increased cash flow that, combined with reduced capex, should see increased scope for capital return, even as the fund maintained its underweight in peer Woodside partly offset the detraction from holding Santos through the takeover collapse. L1 Capital reiterated its standalone conviction the same month, noting that despite the unsuccessful takeover outcome, it continued to believe Santos remained an attractive investment proposition at the prevailing share price.

A cash-harvesting phase begins

By early 2026, that standalone thesis had crystallised into a specific capital returns story. Equity Trustees Asset Management described Santos as its preferred exposure in the energy sector, noting that following the completion of the Barossa project and with Alaska Phase 1 nearly completed, the company now enters a period of cash harvesting, having committed to return at least 60% of all-in free cashflow to shareholders. The fund highlighted Santos trading at a price-earnings valuation of around 9.6 times 2026 estimated earnings, a 6.3% dividend yield, and a 10.7% free cash flow yield as evidence of an attractive standalone valuation independent of any takeover premium.

What managers are watching next

With the multi-year elevated capex cycle behind it and both Barossa and Alaska Phase 1 now largely complete, the catalysts fund managers are tracking are the pace of capital returns as the 60% free cashflow payout commitment is executed, whether the earnings inflection L1 Capital flagged materialises in the numbers, and whether a fresh approach from another suitor emerges now that the underlying asset value case has been publicly tested by the ADNOC consortium's own due diligence process.