Shareholder Resolution

Members’ statement for resolution relating to the re-election of Keith Spence

ACCR has filed a members' statement with Santos Ltd (ASX:STO) against the re-election of Keith Spence.

This will be voted on at Santos Ltd's AGM on Thursday, 11 April 2024.

Members’ statement for resolution relating to the re-election of Keith Spence (982 words inc footnotes)

Under the direction of chair Keith Spence, the Santos board has failed to deliver a company strategy that maximises shareholder value.

The Santos board has made a series of strategic decisions aimed at growth which have resulted in chronic share price underperformance. With shareholder frustration mounting,[1] the primary strategy the board appears to be contemplating is to merge with or sell off assets to an industry peer. The board’s options are decreasing, with the highly publicised merger talks with Woodside recently concluding without a deal.[2]

Santos operates in a “sunset industry”[3] facing long-term structural demand decline and a challenging future operating environment. The company needs a high-calibre chair, with the requisite skill and judgement to properly weigh its strategic options in the face of the energy transition and to deliver satisfactory shareholder returns.

As Chair since February 2018, Spence is ultimately responsible for the company's poor performance and strategic failings. A vote against him is warranted.

Company underperformance relative to peers

Santos' pivot to a growth strategy and subsequent underperformance casts doubt on the board’s judgement. The shift to a growth strategy was marked by the final investment decision for the Barossa project in late March 2021. This saw the company move from a low cost operating model (2016-2020), with average annual capex of US$711m p.a, to a growth phase (2021 to 2023), with average annual capex of US$1,780m p.a.[4] This amounts to a 150% increase in capex.

To date, this growth phase has delivered only 7% total shareholder returns (TSR).[5] This is a drastic underperformance when compared with peers and relevant indices over the same period. For example:

  • average TSR for global and Australian peers ('peer group') was 82%. Peer TSR’s were:

    • ConocoPhillips (142%), ExxonMobil (98%), Equinor (94%), Shell (84%), TotalEnergies (69%), Eni (69%), BP (63%), Chevron (57%) and Woodside (57%)
  • MSCI World Energy Index was 76%

  • ASX200 was 18%

This demonstrates Santos’ capex-heavy growth strategy is not delivering for shareholders. At the 2023 investor day CEO Kevin Gallagher noted his frustration with the "cheap" share price, acknowledging "It's stalled, and we need to unstall it".[6]

Santos is also a laggard in returning capital to shareholders. With a 5.8% 2023 dividend and share buyback yield[7], it is the lowest amongst its peer group. The average 2023 dividend and share buyback yield for the group is 9.7%.

Santos did not disclose an investment hurdle for new projects in its 2023 Investor Day presentation, unlike recent equivalent disclosures from many in its peer group (e.g. Shell, BP, TotalEnergies, Woodside). This means the level of profitability the Santos board demands from new projects is opaque.

Additionally, for company Return on Average Capital Employed (ROACE) targets Santos is using more optimistic oil price assumptions than its peer group. Santos has the highest oil price assumption of the selected peer group, with an implied 2028 Brent price of $83/bbl (calculated from a $75/bbl 2023 real price). This is 15% above the peer group’s average of $72/bbl. Santos’ use of higher oil prices could drive the company to progress projects its peers would not, exposing its shareholders to higher risk in the energy transition.

Remuneration framework not incentivising shareholder returns

Santos' remuneration settings are misaligned with governance norms and insufficiently incentivise management to focus on shareholder returns.

On 21 April 2021 the board announced a $A6m bonus for CEO Kevin Gallagher to incentivise Santos' growth pivot.[8] At the time, a governance expert reportedly described it as an incentive “to deliver on future projects that have yet to deliver earnings and value for shareholders”, creating a situation where Gallagher “could still get his bonus if the board subjectively determines performance hurdles have been achieved, even if they don’t generate shareholder value”.[9] The Australian Shareholder Association also expressed concerns regarding the absence of “a hurdle set to ensure shareholders had a good outcome”.[10]

The absence of any clear linkage between shareholder returns and the CEO’s growth incentive bonus was a major error of judgement by the Santos board that investors are now paying for.

Management accountability

Multiple incidents indicate the board is either unwilling or unable to exercise an appropriate level of control over management and hold it to account, as required under ASX Corporate Governance guidelines.[11] The longstanding partnership between the Chair and CEO has raised questions about the board's ability to hold management to account.[12]

The Santos board permitted the extraordinary appointment of CEO Kevin Gallagher as a Mineral Resources Non-Executive Director in March 2022,[13] amid Santos' $A22 billion merger with Oil Search, despite the obvious conflicts it would introduce with respect to Gallagher's availability and prioritisation of Santos, in addition to potential business conflicts of interest.[14] The appointment was reversed following public shareholder discontent.[15]

Staff satisfaction with management is persistently low:

  • an internal 2021 survey indicated that 'trust in leadership' and belief among staff that Santos was 'effectively managed and well run' was 'well below benchmarks'.[16]
  • CEO approval among staff has been as low as 23 per cent, according to Glassdoor.[17]

Further examples of concerning company culture include: the board's approval of the leasing of a private jet ($US 23 million) in 2022 for board and executive travel, which was undisclosed in company reporting documents but revealed in the media;[18] and the revelation that Alex Epstein, a vocal opponent of the scientific consensus on climate change, was invited to speak with executive staff.[19]

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  4. Bloomberg. Capex is based on calendar years, including an estimate for 2023 ↩︎

  5. US$ TSR from 30 March 2021 (i.e. Barossa FID) to 31 December 2023 ↩︎

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  7. The dividend and share buyback yield is the sum of 2023 dividend yield (Bloomberg estimates as of 31 December 2023) and share count yield for the period from 31 December 2022 to 31 December 2023 ↩︎

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  10. CapitalIQ, Santos 2021 AGM transcript, p20 ↩︎

  11., p6, Recommendation 1.1 ↩︎

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