Santos unveils $3.5 billion capital boost

Santos will shore up its capital position to the tune of $3.5bn and tapped a resources veteran to head up the company.

Embattled oil and gas producer Santos will look to shore up its capital position to the tune of $3.5 billion and has also tapped a resources veteran to head up the company.

Santos (STO) unveiled a suite of capital initiatives this morning, including a new equity raising, private placement and stake sale designed to reduce the company’s overall net debt.

The measures come after a strategic review of the business, which has been stung by the recent weakness in global energy prices.

As part of the overhaul, the company also appointed current Clough chief executive Kevin Gallagher as its managing director and chief executive officer. He is expected to begin the role in early 2016.

The measures will see Santos raise $2.5bn through a fully underwritten accelerated pro-rata renounceable entitlement offer, as well as an additional $500m through a private placement to an affiliate of the China-based international private equity firm, Hony Capital. The placement price is a 15 per cent premium to the last closing share price.

Santos will also bank $520m from the sale of a 35 per cent stake in the Kipper gas field to Mitsui E&P Australia.

Executive chairman Peter Coates said the moves reinforced the Santos balance sheet and marked a significant step towards restoring long-term value for shareholders.

“The review has shown that we can further streamline the business and enhance financial discipline and the board is absolutely committed to pursuing those opportunities,” he said.

“We are very confident that the steps taken today will drive better returns for shareholders by strengthening the company’s financial position and underscoring the value of its high quality and diverse asset base.”

Shares in Santos were placed in a trading halt earlier today, pending a release to the market about the new raising.

Speculation had been rife this morning that the embattled oil and gas explorer would unveil a sweeping overhaul of its operations sooner rather than later.

Management at the country’s third-largest energy producer, now run by mining heavyweight Peter Coates, had been conducting a wideranging strategic review of the debt-laden business.

Santos has been hit hard by the global fall in energy prices ­because of the high amount of debt it took on to build the $US18 billion ($25.6bn) Gladstone LNG project, in which it has a 30 per cent stake.

An 82 per cent fall in first-half profit resulted in job cuts, a reduction in capital expenditure and the removal of chief executive David Knox in August.

Santos also expects a $900m reduction in 2015 capital expenditure at $1.8bn, compared with original capex guidance of $2.7bn.

Fiscal 2016 capex guidance of $1.2bn is 33 per cent lower than the year prior.

All fiscal 2015 production guidance is maintained, while fiscal 2016 guidance is seen between the range of 57 million barrels of oil equivalent (mmboe) and 63 mmboe. Sales volumes are seen between 76 mmboe and 83 mmboe.

Late last month, Santos said it had rejected as too low a $7.14 billion takeover offer from Bermuda-based Scepter Partners — a private-equity firm backed by sovereign investors and wealthy members of Asian and Gulf-based ruling families. The indicative offer was worth $6.88 a share in cash.

Santos, which was founded in 1954, focused in its early years on domestic natural-gas production, building up a portfolio of assets in Australia before broadening into oil output and countries further afield by the late 1980s.

It is now producing and exploring in Australia, Papua New Guinea and parts of Asia including Indonesia and Vietnam.

Santos’s market value has more than halved over the past year as oil has plunged. Investors’ primary concern is the company’s debt, even as Santos continues to invest heavily in a major gas project on Australia’s east coast.

Adelaide-based Santos is among several companies that bet big on feeding Asia with natural gas, anticipating continued growth in developing nations’ need for energy and, in particular, cleaner-burning fuels.

In Australia alone, more than $US200 billion has been invested in recent years on vast liquefied-natural-gas developments that have positioned the country to more than triple LNG exports over the next five years.

Along with smaller operations, Santos also has a minority stake in a $US19 billion Exxon Mobil-led development in Papua New Guinea that began exporting gas last year.