Santos (ASX:STO) and Oil Search (ASX:OSH) have reached a definitive agreement for an all-scrip merger that will create a top tier oil and gas company with a $21bn market capitalisation.

There were no big surprises to the final deal, with Oil Search shareholders set to receive 0.6275 new Santos shares for each OSH share they own, giving them about 38.5% of the merged company.

Oil Search’s directors have unanimously recommended that the company’s shareholders vote in favour of the merger in the absence of a superior proposal.

Once that is met, the merger will still need to secure regulatory approvals and Papua New Guinea court approval.

Santos expects the merger to unlock pre-tax synergies of US$90m to US$115m per annum, which will benefit both sets of shareholders.

“The merger represents an attractive combination of two industry leaders to create a regional champion of quality, size and scale with a unique and diversified portfolio of long-life, low-cost oil and gas assets,” Santos chairman Keith Spence said.

“The merged entity will be well positioned for success in the new era of oil and gas, with strong cashflow generation from a diverse range of assets providing a platform to self-fund growth and deliver shareholder returns.”

Santos managing director Kevin Gallagher, who will lead the combined company, said the merger will offer “increased scale and capacity to drive a combined disciplined, low-cost operating model and unrivalled growth opportunities over the next decade”.

Size does matter with this merger

The merged company will have a diversified portfolio of high quality, long-life, low-cost assets across Australia, Timor-Leste, Papua New Guinea and North America with significant growth options.

It will have a pro-forma 2021 production of about 116 million barrels of oil equivalent while its combined proved and probable reserves along with best estimate contingent resource will stand at about 4,867MMboe.

Additionally, the merged company will have more than US$5.5bn in liquidity to self-fund development projects, whilst maintaining further optionality and flexibility to optimise the portfolio.

The company will maintain Santos’ goal of achieving net zero emissions by 2040 and continue Oil Search’s social and community investment in Papua New Guinea and North America.

Oil Search shareholders will vote on the merger at the end of November while final PNG court approval will be sought on 1 December.