Investors took a deep breath and returned to Santos (STO) shares yesterday afternoon after a sell off in the morning shattered confidence in the stock for a while and sent the shares to a 10-year low.
The shares plunged more than 10% early on after it revealed the turmoil in world oil and financial markets had forced it to pull a planned half a billion euro (around $A735 million) hybrid debt raising in Europe.
The shares plunged to a low of $8.13, the lowest the shares have been since late 2004. The shares didn’t get as low in the GFC. They then slowly recovered to close down just over 3% on $8.73.
News of that deal had startled investors when it was announced in late November, especially when Santos management seemed to underplay its importance.
At the same time the company revealed it would be cutting costs, but even those commitments, made on investor day, seemed not to reflect gathering fears that the slide in oil prices from June might deep.
Deepen they did, as we know and Santos has been caught on the back foot – the hybrid issue has been pulled because the interest rate and other terms would have been too harsh, if such a raising could be done in the present nervy atmosphere.
Santos now says it will slash capital and operating expenditure much faster than previously announced.
STO YTD – Santos shelves EU debt raising
The company’s chief financial officer Andrew Seaton said yesterday the company had decided to defer any hybrid issue until market conditions improve, because of the rapid plunge in oil prices in the wake of OPEC failing to cut production last Thursday.
Seaton said Santos holds a “robust” funding position with $2 billion in available liquidity but will review its spending plans for 2015.
“Given the current oil price environment, it is prudent for the company to review its spending plans for 2015 and we expect to significantly reduce capital and operating expenditure,” Mr Seaton said yesterday.
Investors will want more details, quickly, of those cuts. The likes of Woodside, BHP Billiton and Rio Tinto are far more advanced in their cost-cutting and efficiency drives.
Santos has existing outstanding hybrid capital securities on issue in the European markets. But yields on those securities have come under pressure after the company flagged plans to issue more securities as oil prices are making a new issue too expensive.
Fairfax Media pointed out yesterday that Santos could also be under pressure to protect its BBB+ Standard & Poor’s credit rating which is on negative outlook to reflect the ”commissioning risk of the company’s two LNG projects” in Queensland and Papua New Guinea.
S&P’s base-case assumption in evaluating Santos assumes a Brent price of $US100 a barrel and a currency of the Australian dollar worth 90 US cents. Brent oil is closer to $US70 a barrel and the Aussie dollar is around 84 USc. That could spell problems for Santos if they persist around these levels, especially the oil price.
CBA’s credit analyst, Scott Rundell, was quoted as saying that with the outlook already negative for 18 months, S&P was likely to be having a “good hard look at the rating”. He was of the opinion that the risk of a downgrade is greater than 50%.
Analysts reckon Santos is the hardest hit of our listed oil groups, thanks to rising debt which is forecast to top $8 billion by the end of next year, with the company planning to spend $2.7 billion on capex in 2015. That is now under review and will have to be slashed to convince the market.
Analysts also wonder how long the company can maintain its vow, made in February, to adopt a progressive dividend policy, (meaning its dividend would never be lower than the previous year) in the face of a fall in revenue and earnings next year.
Credit Suisse analyst Mark Samter told Fairfax Media there was little chance Santos could pay a higher dividend based on cash generation alone, meaning the company might have to resort to a dividend reinvestment plan to underwrite its promise.
"I think at the current oil price Santos might struggle to buy a round of beers at next year’s Christmas party, let alone any material capital outlay," he said.
And Citi analyst Dale Koenders told Fairfax Media the dividend could rise, as long as there was a DRP to offset it.
"Given they are cutting discretionary capex though, you can expect any growth in the dividend would be modest," he said.
