The revelation that Santos (ASX:STO) made a non-binding offer for Oil Search (ASX:OSH) has been the talk of the town, especially since it appears to make a lot of sense.

After all, the combination of the two companies would result in the creation of a $22bn oil and gas giant that will rank in the top tiers of both the ASX and global oil and gas companies.

By way of comparison, Woodside Petroleum (ASX:WPL) – Australia’s largest petroleum company – currently has a market capitalisation of $21.3bn, though it is worth noting that all three companies have seen their stocks pummelled by the COVID-19 outbreak.

And therein lies the rub with Santos’ offer.

While even Oil Search acknowledges that combining the two companies will make sense, its issue with the all-share offer of 0.589 STO shares for every OSH share is that the implied price of about $4.25 per share doesn’t reflect the company’s value.

This is a belief that is widely shared by analysts with the Australian Financial Review quoting both UBS and Morgan Stanley as thinking that Santos offering up 40% of the combined group to Oil Search shareholders would be more appropriate than the current offer of about 37%.

Still, not bad at all for a company that was worth just $250m when its former managing director Peter Botten took the helm back in 1992 – and was subsequently built up to its position as a major player in the liquefied natural gas sector over his record breaking 25-year tenure.

Oil Search’s troubles with his replacement, Dr Keiran Wulff, who resigned earlier due to health reasons, are a whole different story, though his resignation did bring the Santos offer into the spotlight.

Looking ahead, it’s hard to see how Santos will just let this go.

Acquiring the Papua New Guinea-focused company will not only bring its substantial 29% stake in the PNG LNG into the mix, it will give Santos exposure to the Alaskan North Slope where Oil Search is developing the first phase of the Pikka project that could produce 80,000 barrels of oil per day.

Whether Santos is keen to keep Alaska in its portfolio is unknown but it certainly adds value to the core LNG asset.

Oil continues to slip

While Australian punters are eyeing the potential for Santos making a more concrete – and hopefully substantial – bid for Oil Search, oil prices have been trending down over the past week with the benchmark West Texas Intermediate and Brent Crudes down 6.8% and 6.3% to US$66.76 per barrel and US$68.84/bbl respectively.

This comes on fresh fears about the quick-spreading Delta variant of COVID-19 and OPEC+ agreeing to increase its oil output from August.

While oil prices are still elevated from the same time last year, concerns have been raised about whether additional restrictions introduced to arrest the spread of the Delta variant will impact demand.

However, this did not seem to have stopped Goldman Sachs from reiterating its US$80/bbl price forecast for Brent crude this summer in the Northern Hemisphere.

Energy small caps

While the big players hog the limelight, small cap oil and gas companies on the ASX continue to push ahead with their respective projects.

Norwest Energy (ASX:NWE) and its operating partner Mineral Resources (ASX:MIN) have spudded the intriguing Lockyer Deep-1 gas exploration well in the north Perth Basin.

The well will test a large structure at the Kingia and High Cliff formations that is trending with significant discoveries such as Waitsia and West Erregulla.

Norwest has estimated the geological chance of success at about 38% and success could unlock mid-case resources of about 459 billion cubic feet of gas (92Bcf net to the company).

Meanwhile, Strike Energy (ASX:STX) has increased its effective interest in the aforementioned West Erregulla gas project to 54% by acquiring a 8.16% stake in its partner Warrego Energy (ASX:WGO).

The company said the West Erregulla has material, long-term value and increasing its exposure to the field is consistent with its strategy to generate value from the Perth Basin.

Over in the Northern Territory, Central Petroleum (ASX:CTP) has spudded the WM28 development well at its Meerenie field.

WM28 is being drilled at a crestal location targeting increased gas production using lessons learned from the previous WM27 well.

Along with the four recompletions, these wells are intended to increase field capacity to support marketing gas into what is anticipated to be an increasingly tight east coast gas market.

Stonehorse Energy (ASX:SHE) has executed an agreement with Liberty Oilfield Services for the provision of equipment and personnel for the completion of the Jewell 1-13-12 SXH well in Carter County, Oklahoma.

Completion equipment and personnel are expected to be on site by the end of July to commence completion operations, with production and sales to follow imminently.