Santos in $1.5bn capital raising

Institutional and retail holders will be tapped as Santos seeks to strengthen its balance sheet amid an operational overhaul.

The raising comprises a retail and an institutional share offering.

Oil and gas player Santos is passing around the hat for a $1.5 billion equity raising to fund the group’s overhaul, which recently appointed chief executive Kevin Gallagher dropped on the market last week.

Institutional shareholders will be tapped for just over $1bn, while retail shareholders will be given the opportunity to buy into a $500 million share purchase plan. That is expected to be carried out at an 8-10 per cent discount, to shore up the company’s balance sheet as it tries to ditch its non-core operations in the tough, low oil price environment.

“Santos is now operating under a new CEO and management team, a lower cost operating model and a well-defined strategic plan,” Santos chairman Peter Coates said. “The equity raising is a key step in ensuring that Santos now has a solid platform for growth.”

Last week, the Adelaide-based company revealed a plan to rid itself of 23 non-core assets for a future focused on its five biggest projects.

Chief executive Kevin Gallagher, who has been in the top gig since February, appointed former AWE chief Bruce Clement to run the basket of non-core assets from Sydney and either sell or squeeze extra value out of them.

The assets, which have been valued at around $200m, were unsuccessfully tested for sale last year when Santos did a company-wide review. They include the controversial Narrabri coal-seam gas project in NSW, offshore Australian fields and assets in assets in Indonesia, Vietnam, Malaysia and Bangladesh.

Meanwhile, five standout projects represent around 95 per cent of the Santos’ enterprise value: the Cooper Basin assets in central Australia, the Gladstone LNG project, its non-operating stake in the PNG LNG project, northern Australian assets including Darwin LNG, and West Australian gas.

“This capital raising provides the opportunity for existing and new institutional investors to support a stronger Santos with improved operating performance through the transformation of the business and the focus on five core longlife natural gas assets,” Mr Gallagher said. “It will remove the constraints around growing the business in a low oil price environment.”

The raising is the second in around a year for Santos, with the company this time last year tapping shareholders for $2.5 billion. The group also raised another $500 million in a placement to China’s Hony Capital.

It comes as Santos is attempting to pay down an extra $US1.5 billion ($2bn) of debt by the end of 2019, after spending big on projects ahead of the LNG boom.

Mr Gallagher replaced former boss David Knox, who departed the role after Santos was caught in the oil price bear market last year. It coincided with the group’s revelation of a first-half loss of $US1.1 billion in late August, its first interim or full-year loss in 20 years. The loss included a $US1.05bn writedown of the group’s flagship GLNG project.

Despite a 20 per cent rally this year, Santos shares are still down more than 70 per cent from their 2014 high of more than $15 a share. The stock closed at $4.41 on Wednesday.

As Santos struggles to rein in its cash flow and pay down debt, the pressure to undertake more radical measures is starting to come to fruition. Santos is believed to have cut more than 1000 workers from the company over the last 18 months.

Following the latest raising, Santos said it will have a gearing ratio of just over 30 per cent, with the additional capital removing potential uncertainty around its ability to build and grow a sustainable business in a low oil price environment.

The company recently hedged oil production to protect the company against falls below $US50 a barrel but will also cap gains if oil prices shoot higher than $US62. Crude is currently trading around the low $US50 range.