ARKANSAS, February 9 (Future Headlines)- As the energy market navigates shifts and failed merger talks, Santos, an Australian energy company, finds itself at a crossroads. L1 Capital, a hedge fund, has reignited its campaign to split Santos’ liquefied natural gas (LNG) assets, aiming to rejuvenate the company’s stagnant share price.

In October, L1 Capital publicly proposed the demerger of Santos’ LNG assets in Australia and Papua New Guinea, citing undervaluation concerns relative to industry peers. The plan garnered attention, prompting Santos CEO Kevin Gallagher to address it during an investor day, acknowledging the need to address the company’s underwhelming stock performance.

With merger talks with Woodside off the table, L1 Capital is ramping up pressure on Santos management, advocating for a thorough evaluation of the demerger proposal. James Hawkins, head of L1 Capital Catalyst fund, emphasizes the strategic importance of Santos’ LNG assets and believes that separating them could unlock significant value for shareholders.

L1 Capital, managing approximately A$6 billion in assets, holds about A$400 million worth of Santos shares. Hawkins asserts that a spin-off could yield a premium valuation for the LNG business, potentially boosting the combined value of the two entities by up to 40% from current levels.

However, skepticism abounds among other shareholders, wary of L1’s bullish assessment. Jason Beddow, managing director at Argo Investments, questions whether the market would indeed assign a higher value to the spun-off LNG arm. He also raises concerns about the potential impact on funding for Santos’ other projects, such as the Pikka oil project in Alaska and the Dorado oil and gas project in Australia.

Despite these reservations, Hawkins remains optimistic, highlighting the appeal of the standalone LNG entity to global energy majors like TotalEnergies, Exxon Mobil, and BP. He believes that Santos’ high-quality LNG assets could attract significant interest from industry players seeking to bolster their LNG portfolios.

Casey McLean, a portfolio manager at Fidelity, suggests an alternative approach for Santos, proposing the sale of certain domestic assets to fund a share buyback. This strategy could streamline operations and potentially enhance shareholder returns without the complexities associated with a demerger.

Meanwhile, Santos continues its review process to explore options for value creation. The company’s decision-making may also be influenced by CEO Kevin Gallagher’s lucrative bonus agreement, which is tied to delivering on major growth projects by the end of 2025.

Reporting by Moe Khaled; Editing by Sarah White