South32, Woodside, ALS All Batten Down The Hatches

Shares in global testing giant, ALS ended more than 5% higher in yesterday’s late sell-off after the company told the ASX that it was marshaling its financial forces to survive the impact of COVID-19.

The shares ended at $5.39, up 5.4% in a market that slumped late to be down 5.4%. That gain was the biggest on what turned out to be a miserable day for the ASX.

But surprisingly there was no mention of the company withdrawing its guidance.

That guidance was issued last November with the interim results;

“Group underlying NPAT from continuing operations for the full year is expected to be in the range of $185 million to $195 million. This is based on current market trends, reflecting the seasonality of the business and subject to no material changes in the operating or economic environment, including US and China trade tensions, Brexit and the political and social situation in LATAM, Africa and Hong Kong.”

COVID-19 and the shutdown of economies from China, to South Korea, the US, Australia, and Europe are certainly “material changes”.

But Friday’s statement makes clear the company is more worried about that end of year debt and bolstering its credit lines because it sees strains coming down the line.

But equally, you would have thought that as a testing company, it could be a major player in the COVID-19 detection and control business.

But the statement made it clear the company plans to get as much money together so it can repay a $US245 million private loan that is due at the end of 2020.

The balance sheet “remains strong with a leverage ratio broadly in-line with previous reporting periods and well within the key debt covenant of 3.25 times approaching the 31 March year-end,” director said in the statement.

“As part of its conservative and prudent capital management plan, the Group has taken the precaution to draw down sufficient funds from its existing bank facilities to meet the maturation of a ~$A245 million US Private Placement (USPP) debt tranche, due at the end of calendar year 2020.

“In addition to this drawdown, the Group maintains strong liquidity with in excess of $A200 million of undrawn facilities and cash available.

“To mitigate against the possibility of a longer-term COVID-19 impact, ALS is also taking the pre-emptive action of working with bank lenders to increase existing facilities and the leverage ratio covenant for a period of time and continues to monitor the USPP market for longer-term financing.

CEO and Managing Director, Raj Naran said, “The safety of our people remains our key priority and we are following strict guidelines aligned with the advice of public health authorities to minimise the risk of infection and transmission of COVID-19”.

“ALS continues to focus on aligning costs with client demand across all operations. The ‘hub and spoke’ model employed across most of the Group gives management the ability to react quickly to changing market conditions. In addition, non-essential capital expenditure has ceased and the Group has increased its focus on cash collection to support liquidity.,” Mr. Naran said in the statement.

There it is – the emphasis on cash, liquidity and “balance sheet strength”.

Cash and spending cuts were the name of the game in Friday’s major statement from Woodside Petroleum as it prepares to face the twin impact of COVID-19 on its operations and demand for oil and gas, the more dangerous oil price and volume war between OPEC and Russia and US frackers.

Oil is down to just over $US22 a barrel in New York – down 62% year to date and Woodside Petroleum’s shares fell more than 6% on Friday to $16.84 and are now down more than 51%.

The company has been laying off staff and starting measures to deal with COVID-19 but on Friday escalated the action to a 60% slash of investment spending and placed billions of dollars of projects on hold.

Woodside deferred its final decisions on highly anticipated liquefied natural gas (LNG) expansion projects off the WA coast, including the $17 billion Scarborough venture with BHP, and the expansion of the prospective expansion of the Pluto and Browse projects.

“The unprecedented circumstances that have unfolded globally over recent weeks are impacting our people, our business and our industry,” Woodside chief executive Peter Coleman said in the statement.

“We are also responding to the lower, more volatile oil price environment by taking difficult but prudent decisions to reduce our expenditure for this year and to delay targeted final investment decisions on our growth projects.”

Woodside said it will cut capital expenditure this year to $US1.7 billion from $US4.5 billion. Woodside’s total spending for 2020 is being axed by 50% to about $US2.4 billion, including about $US100 million in operating cost cuts.

Earlier this week, Santos slashed investment spending by 38% to $US550 million this year and delayed a new project off the coast of Darwin.

Earlier this month, Oil Search shelved major gas projects all around the world and halted negotiations to sell a stake in assets in Alaska as it lowered its expected spending by up to $US675 million, or 40%.

South32 shares fell 5.8% to $1.77 yesterday after it announced that it will slash capital expenditure and suspended its on-market buyback.

“The initiatives announced today are aimed at delivering approximately US$160M in lower expenditure over the next 15 months to protect our financial position,” the company said in Friday’s statement.

“Our balance sheet remains strong, with reported net cash of US$277M on 31 December 2019, including cash and cash equivalents of US$1.4B, no term debt and an undrawn US$1.5B revolving credit facility.

” Sustaining capital expenditure savings will be realised by a reduction in spend of 10% in FY20 and 18% in FY212. In addition, to prepare for a potentially extended period of low prices, we are reviewing activity across the Group aimed at delivering a meaningful reduction in controllable costs.

“We have suspended the remaining US$121M of our current on-market share buy-back with the opportunity to review its extension ahead of its expiry on 4 September 2020.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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