Shares of Australia’s Santos surged to a five-week peak on Friday after reports emerged that the company is engaged in discussions for a potential merger with Woodside Energy.

Santos and Woodside Energy, two major players in Australia’s oil and gas sector, have initiated talks to explore the possibility of merging, potentially forming an AU$80 billion ($52 billion) oil and gas giant.

In a statement released on Thursday, Santos conveyed that it is simultaneously evaluating various alternative structural options with the aim of unlocking value.

“Concurrently, Santos is assessing a range of alternative structural options with a view to unlocking value,” according to the statement.

Early in Friday’s trading, Santos witnessed an 11% spike in its shares, while Woodside experienced a marginal decline of 0.7%.

Santos, boasting a market capitalization of approximately AU$22 billion, had disclosed during an investor briefing the previous month that it was actively exploring strategies to enhance its value. On the other hand, Woodside commands a market capitalization of about AU$57 billion.

Both companies stressed in press statements that the discussions are at a preliminary stage, emphasizing the lack of certainty regarding the outcome of the talks.

Last June, Woodside completed a merger with BHP Group’s oil and gas arm. In 2021, Santos acquired Oil Search, an energy exploration company, but faced setbacks in a multibillion-dollar gas drilling project due to a legal challenge.

The global oil and gas industry has witnessed a wave of consolidation, with major U.S. deals in October involving Exxon Mobil acquiring shale rival Pioneer Natural Resources and Chevron purchasing Hess in a $53 billion all-stock deal. Recently, the Wall Street Journal reported talks between Occidental and shale driller CrownRock.

The discussions between Woodside and Santos follow the collapse of a $13 billion bid by Brookfield to acquire Origin Energy, Australia’s largest power retailer, after the deal was rejected by Origin Energy’s shareholders.

Citi’s head of energy, James Byrne, expressed optimism about potential benefits and some drawbacks, suggesting that a merger could address Woodside’s portfolio challenges and help Santos improve its balance sheet. However, he highlighted the key challenge for Woodside’s board in determining a value that would satisfy Santos shareholders.

Byrne also raised concerns that Santos shareholders might face risks related to the Scarborough shoal, an area claimed by both the Philippines and China.

This information was sourced from CNBC.