Santos under pump to raise capital

Oil and gas company Santos “simply must raise capital” in the face of slumping oil prices or risk failing to break even on a cashflow basis, argues investment bank Credit Suisse.

Oil and gas company Santos “simply must raise capital” in the face of slumping oil prices or risk failing to break even on a cashflow basis, argues investment bank Credit Suisse.

In a research note, Credit ­Suisse said Santos needed an oil price of at least $US83 a barrel for its cashflow break even.

“Santos is a business that simply must raise capital,” Credit ­Suisse energy analysts Mark Samter and David Hewitt said.

“The longer-term damage of not doing so far outweighs any short-term logic in just battening down the hatches.”

Global oil prices have recently fallen to six-year lows, sparking a slide in Santos’ shares, which lost 50 per cent of their value over the past year.

Using Mr Samter and Mr ­Hewitt’s model for Santos’ production costs of about $US27 per barrel, the energy group would need an oil price of $US83 a barrel to be free cashflow neutral from 2015 to 2020.

When a company is free cashflow neutral, the group should have an even amount of money coming in and going out.

The analysts said rival producers Woodside and Oil Search generated a sustainable cash flow at prices around $US70 a barrel, but Santos would see a cashflow loss of 5.5 per cent.

When the oil price is about $US115 a barrel, Santos becomes more cashflow generative than Woodside and Oil Search.

“This is truly a business built for high oil prices,” Mr Samter and Mr Hewitt said.

The even greater challenge for Santos, the analysts say, is that it heads into this outlook with a balance sheet built for high oil prices rather than levels around $US50 to $US60 a barrel.

After a slight rally last week, global benchmark Brent crude closed down almost $US3 at $US56.41 a barrel.

Santos shares closed down a further 6.8 per cent to $7.02 yesterday, against a benchmark index fall of only 1.25 per cent.

Business Spectator