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Santos slumps on latest share raising

Posted by on 18/07/2018

Santos CEO Kevin Gallagher last week coutlined plans to accelerate cost and debt reduction. Photo: David Mariuz Santos stock has slumped below the price of its latest $1.5 billion share placement, which came just a matter of months after the troubled oil and gas group appeared to signal it would not need to tap investors for more funds.

Late on Wednesday, Santos said it would raise $1 billion via a placement to institutional investors overnight, and the balance via a non-underwritten issue to retail investors in coming weeks.

The $4.06 institutional placement price was substantially cheaper than the $6.88-a-share takeover offer it rejected last year.

Investors pushed the shares down 10 per cent to $3.95 on Thursday, questioning the timing of the fundraising just a week after chief executive Kevin Gallagher outlined plans to accelerate cost and debt reduction.”Why raise fresh capital now? …This is a question we do not have a good answer for,” RBC analyst Ben Wilson told clients in a note on Thursday.

“At the September briefing, [chief executive] Kevin Gallagher was adamant credit metrics would survive $US45/bbl oil thus required no [capital] raise,” Citi analysts Dale Koenders and James Byrne said, “but on [Wednesday’s] conference call, Gallagher struggled to provide an answer as to what had changed vs prior comments, or quantify what the money would be spent on beyond ‘reducing gearing to support growth’.

“This raises many fears as to what could be going wrong with GLNG, credit ratings, cost-out targets etc, and concern that the outlook is not as great as we had thought.”

Built at a cost of $US18.5 billion ($25 billion), GLNG is the group’s Queensland export gas project. Investors hold deep-seated concerns over its viability at present oil and gas prices.

“We find the notion of a Santos equity raising now a little difficult to reconcile with the raft of self-help measures outlined last week at Santos’ annual strategy day,” Mr Wilson wrote.

“Santos seemed to be on an an even keel, with break-even free cashflow reportedly down to $US39/bbl and seeking to trend lower.

“Non-core assets are to be hived off into a separate vehicle to be run for cash or divestment. Additionally, output expectations for GLNG (and by association development expenses) had been pared back to just 6 million tonnes per annum by 2019 versus notional plant capacity of over 8 million tonnes per annum.

“So why raise fresh capital now and incur more dilution of any remaining valuation upside? This is a question we do not have a good answer for.

“We can understand why new management may want additional financial capacity, reduce debt further and possibly apply more funds to expansion capex; however, the requirement for new equity capital is somewhat at odds with the messaging put forward last week.”

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