The Santos Ltd (ASX: STO) share price is on fire today.
Shares in the S&P/ASX 200 Index (ASX: XJO) oil and gas stock closed yesterday trading for $6.83. In early morning trade on Friday, shares rocketed to $7.58 apiece, up a whopping 11.0%.
After some likely profit-taking, shares are currently swapping hands for $7.27, up 6.37%.
For some context, the ASX 200 is down 0.3% at this same time.
The Santos share price is racing ahead of the benchmark after the company confirmed media rumours that it was discussing a potential merger with Woodside Energy Group Ltd (ASX: WDS). That confirmation hit the wires after market close yesterday.
The Woodside share price is down 2.8% on the news.
Here's what's happening.
A merger of two ASX 200 energy giants
The potential merger of Santos, with a market cap of more than $22 billion, and Woodside, with a market cap of more than $55 billion, would create a new Aussie energy giant.
Yesterday Woodside said that it "confirms it is in discussions regarding a potential merger with Santos".
However, the ASX 200 energy company stressed there were no guarantees the merger would go ahead.
"Discussions remain confidential and incomplete, and there is no certainty that the discussions will lead to a transaction," management said.
Santos separately confirmed that merger discussions with Woodside had been taking place. The company stated, "Santos continuously reviews opportunities to create and deliver value for shareholders."
Judging by the soaring Santos share price today, management is on the right track here.
Why is the Santos share price soaring while Woodside shares are slipping?
A merger of the two ASX 200 energy stocks is likely to benefit both companies over time.
According to UBS analyst Tom Allen (courtesy of The Australian):
The rationale to merge is clear, it could create a giant APAC LNG company, with a well-diversified asset base and a product mix of over 70% LNG, providing a globally unique LNG exposure, with the scale to self-fund energy transition and pursue further material growth in the Gulf of Mexico and PNG.
But Woodside isn't joining in with the Santos share price rally today, as it could prove costly for Woodside to seal the deal and drag on shares in the shorter term.
Allen said that Santos shares were trading at a significant discount to Woodside shares. He said that UBS saw "considerable value in Santos' portfolio, not reflected in the price".
Allen added, "For a merger to proceed, Woodside must be willing to recognise and pay up for that value, which represents the biggest risk to a merger proceeding in our view."