Santos to slash and burn as weak crude prices take toll

Santos

Oil and gas player Santos is preparing for sweeping job cuts and a clear-out of its smaller, non-core assets as weak crude prices continue to weigh on its share price and threaten efforts to repair its cash-constrained balance sheet.

The company, which has been led by Kevin Gallagher since February, may cut close to 600 jobs, according to sources, with the retrenchments focused on operational positions in the Cooper Basin and in Queensland. A number of heads may also roll at its headquarters in Adelaide amid deepening fears about the ability of Santos’s management to execute a speedy turnaround.

A spokesman for the company declined to comment about the cost-cutting measures or mooted asset sales.

While it is understood Santos has yet to launch a round of widely anticipated auctions, Gallager stressed this remained the preferred strategy when he met recently with sell-side analysts. At the briefing, summarised in a research note by Morgans, the new CEO pointed out that 23 of 28 operating assets accounted for just 5 per cent of the company’s value.

Santos’s half slice of the Casino basin off the coast of Victoria is viewed as among a handful of assets that will be hoisted on to the block soon in a deal likely to fetch over $100m.

Smaller rival AWE holds a 25 per cent slice, with the remaining quarter owned by Japanese giant Mitsui.

Santos is understood to have recently received an approach about its Casino stake from a Japanese firm. Inevitably, Mitsui E&P Australia — the regional arm of the Tokyo-based goliath — has been singled out as the logical suitor. The acquisitive firm snapped up Santos’s 35 per cent interest for $520m in the nearby Kipper gasfield in November and a move on the struggling oil and gas player’s holding would give it operatorship of the Otway basin field. Another auction under scrutiny at the rump end of Santos’s empire is the West Australian oil project Mutineer-Exeter. Perth-based Miro Advisers has been awarded the mandate to offload this mature asset, which is co-owned with the Kuwait Foreign Petroleum Exploration Company and Japan’s JX Nippon. Price expectations are rock bottom with sources claiming it is worth less than $20m.

As Santos struggles to rein in its cash flow and pay down debt, the pressure to undertake more radical measures is building.

Some in the market are lobbying for a breakup of the company and DataRoom understands that at least one major bank is running the numbers on this scenario. The theory centres on the argument that Santos’s parts do not add up to the sum of the whole and the greatest value for investors lies in a carve-up of the business.

Last week, Macquarie’s analysts claimed the remedy was either a sale of its stake in the Exxon-operated PNG LNG project, or another blockbuster equity raise. If Gallagher opted to sell off the crown jewels, Macquarie argued, management could bank $US2.7bn, enabling it to repay a €1bn subordinated note as well as a portion of its $US1.7bn export credit facility. This would lighten its debt load and remove any threat of another credit downgrade from ratings agency, S&P. Without such a radical move, Macquarie predicted the company may be forced into another dilutive raise, this time in the order of $US3.5bn. The increasing anxieties over Santos come as InterOil investors prepare to cash in later this month on ExxonMobil’s $US2.5bn-plus takeover proposal for the PNG-focused explorer. While the US giant elbowed aside Oil Search for New York-listed firm, the recent slump in oil prices makes this deal appear fully-priced and the bid is expected to be overwhelmingly endorsed on September 21. Exxon takes ownership of InterOil at the end of the month.