Santos (STO) shares fell nearly 3% yesterday after Macquarie said it needed to raise billions more in fresh capital to stave off a credit rating downgrade, and doubts emerged about a major Chinese shareholder.
Shares in Santos closed down 2.9% to $4.08 after Macquarie said it had to raise $US3.5 billion and should do it sooner than later.
Santos has already slashed costs, cut spending and raised $3 billion over the past couple of years.
Santos raised $500 million via a placement to Chinese group, to Hony Capital and tapped existing investors for $2.5 billion in a rights issue.
Hony later sold the stake to China’s ENN Group, which has come under pressure from Chinese regulators to justify its 11.7% stake in Santos.
Media reports this week said the Shanghai Stock Exchange had asked ENN’s parent company to provide more information on due diligence it performed on the purchase of the Santos stake.
In addition to the Hony issue and the rights issue, Santos also raised another $520 million from sale of the company’s interest in Kipper gas field to Mitsui E&P Australia.
But Macquarie said in a note that is not enough and Santos needs to raise $US3.5 billion in capital to protect its credit rating.
The bank told clients it failed to see how Santos could manage cost cuts deep enough to protect its rating, while the oil price would have to average $US72 a barrel to meet S&P’s targets.
"Cost cutting aside, a raising of US$3.5b ($4.6b) would be necessary to repay Santos’s subordinated note and ECA [export credit agency] facility to achieve an funds-from-operations-to-debt ratio within S&P’s range," the analysts told clients.
"Due to the size of this raising, we are cautious of how the market would react only 18 to 24 months after Santos raised $3 billion.
"However, the raising could be justified as new management clean the decks in one large hit, giving the company a clean slate."
Santos has a €1 billion subordinated note which it can repay from September 2017, along with a $US1.7 billion export credit facility which may also need to be repaid to meet S&P’s ratings requirements.
Macquarie reckons an easy way would be to raise more capital by selling its 13.5% stake in PNG LNG Ltd where Exxon mobil and Oil Search would have prior rights and be interested buyers.
Macquarie said a PNG LNG sale could raise $US2.7 billion.
"Though it would remove much of the company’s future FCF [free cash flow], we believe the sale of one of STO’s key assets, PNG LNG, could solve the balance sheet issues facing the company," the analysts said.
Santos let that note go through to the keeper.
