Treasure Chest: A Santos Raising Would Be Worth Backing

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

FNArena’s Treasure Chest article published on September 15, Santos And Origin, Oil Prices And Debt, outlined the argument from Credit Suisse that while the market was firmly focused on LNG major Santos ((STO)) as carrying the biggest debt burden problem, Origin Energy ((ORG)), on a relative basis, actually had the bigger debt problem, which the market was overlooking.

This is likely because Origin management had indicated no intention to adopt any balance sheet repair measures ahead of its APLNG project ramping up. Credit Suisse decided to downgrade its recommendation on Origin to Neutral from Buy on the basis of capital raising risk.

Origin has since announced a capital raising, and is moving toward completion. The focus is now firmly back on Santos.

Citi believes the cost-out and APLNG production guidance  provided by Origin with its raising announcement suggest a positive read-through for Santos’ assets, including its flagship GLNG, and thus provides key insights into the potential outcome of Santos’ strategic review, still underway.

Santos is planning to sell assets in order to resolve its balance sheet issues, but analysts are not confident the company’s suite of legacy projects will attract sufficient buying interest at a reasonable price. Santos does own 13.5% of PNG LNG, of which Oil Search ((OSH)) is the major stakeholder. Woodside Petroleum’s ((WPL)) recent opportunistic bid for Oil Search is indicative of the value of the PNG LNG project.

But to sell this asset would be to leave Santos almost entirely dependent on GLNG, and lacking in the growth potential only PNG LNG is providing.

Having crunched the numbers, Citi believes the outcome of Santos’ structural review will be $1-2bn of assets sales and an accompanying $1-2bn rights issue. A rights issue implies non-shareholders of Santos will miss out.

“Ultimately we expect that regardless of the path taken,” state the Citi analysts, “the end result should represent substantial upside (34-100%+) versus current share price from de-risking STO’s balance sheet”.

 

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