Another big fall in its share price yesterday has confirmed Santos (STO) as the first significant local victim of the plunge in oil prices.
The company is under immense pressure from the falling share price, judging by Monday’s credit rating downgrade, yesterday’s market activity, and the speed with which the company issued a statement to try and reassure investors.
In fact the company’s shares are down around 50% in the past three months (that’s a loss in value of $7.5 billion), thanks to the fall in oil prices and the company’s slow reaction to the news – especially in late November.
Santos shares fell another 10% in early trading yesterday, then recovered a little to close down 7.2% at $7.70. Its low for the day was $7.46 – a level not seen for well over a decade.
The shares had fallen 10c on Monday to $8.30. The S&P downgrade emerged late in the day.
STO YTD – Santos under pressure
But what really sent the price lower yesterday was the sell off in oil prices overnight Monday, which continued into Asian markets yesterday which saw US West Texas oil drop to a succession of new five year lows approaching $US62 a barrel.
Combined with the news of the downgrade, the 4% plus fall in global oil prices knocked the shares lower for about the 4th or 5th time in the past month.
The oil and gas producer’s credit rating was downgraded late Monday to BBB from BBB+ by Standard & Poor’s, which made it clear the risk of a further cut, to BBB-, the lowest investment grade, still remained by keeping it on a negative outlook (which usually means a one in three chance of a further downgrade in 18 month).
That forced Santos to issue its second statement to the market in a week.
"Santos notes that Standard & Poor’s Ratings Services (S&P) has revised its long term senior unsecured credit rating for Santos from BBB+ (negative outlook) to BBB (negative outlook).
"Santos Chief Financial Officer Andrew Seaton said that Santos retained an investment grade credit rating from S&P.
“Santos has a robust funding position, with approximately $2 billion in cash and undrawn debt facilities available as at 30 November 2014.
“S&P in their announcement note Santos’ track record of a conservative funding approach, favourable debt maturity profile and adequate liquidity. Furthermore, S&P notes project execution risks are diminishing, with PNG LNG starting production in April 2014 and GLNG 90% complete in November 2014,” Mr Seaton said yesterday.
UBS analyst Nik Burns told clients yesterday Santos should be able to maintain its investment grade credit rating without tapping equity markets, unless credit agency Standard & Poor’s slashes its oil price forecast by $US20 a barrel.
Santos has said it wants to keep its investment grade rating, which affects the rates at which it can raise debt. The company has announced plans to cut costs next year and may also implement an underwritten dividend reinvestment plan.
S&P’s analysis is based on an oil price forecast of $US80 a barrel in 2015 and $US85 from 2016. UBS does not expect a massive change to these forecasts, given it also expects a price of $US80 in 2016.
“But we do expect the market to remain cautious on Santos, and the capital raising drums will beat louder if the oil price continues to decline,” Burns said in the note issued on Monday night.
Fairfax Media said JPMorgan analyst Benjamin Wilson had told clients the downgrade had been overdue and possibly should have come in mid-2013 when the 100 per cent equity credit allotted to hybrid securities ended.
He noted that in the absence of action such as the sale of hybrid securities, underwriting of the dividend investment plan or a cut in the dividend, the new BBB rating would be at risk if oil prices were to average below $US75 a barrel or the Australian dollar above US85¢ over the next three years.
S&P "says a successful ramp-up of the GLNG project is key to maintaining the BBB rating," noted UBS analyst Nik Burns.
After talking about a 5000 million euro hybrid issue, Santos last week told the market after another big price fall that the hybrid issue was off.
Mr Seaton said the potential hybrid share issue was always about proactive capital management and the company had flexibility in the timing of any issue.
“Santos confirms that it has no current intention to undertake an equity raising.
“Santos has a robust existing funding position, including approximately A$2 billion in available liquidity.
“In addition, 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.
Since then the shares are down nearly 18%, including yesterday’s fall.
