Santos (STO)

By Jason Fittler,

Santos has outlined a suite of capital initiatives to reduce its net debt. 

The initiatives include the sale of its 35% stake in the Kipper gas field for $520m to Mitsui, $500m placement to Chinese private equity firm Hony Capital at $6.80/share and $2.5bn raised via a 1 for 1.7 accelerated pro-rata renounceable entitlement offer at $3.85/share. 

In total, STO has reduced its net debt by $3.5bn. 

STO also announced the appointment of a new CEO, Kevin Gallagher, previously CEO of Clough Limited. 

Also, the company changed its dividend policy, which will see it pay out a minimum of 40% of NPAT, and has flagged possible impairments of up to $2.4bn (after tax).

Although these measures are welcome, the oil price is still historically low which has had a major effect on the price of STO. 

On Friday, the company’s price fell 7% reducing the discount on the recently announced rights issue making the offer a lot less attractive. 

The long-term play here is the oil price. At present, there seems little indication that the oil price will recover in the short-term increasing the risk associated with STO. 

The institutional component of the entitlement offer is closed; however, the retail component closes on 30th November. 

With the new CEO expected to commence in early 2016, we expect STO to consolidate its business over the next 12-months, given the rapid fall in oil prices and staff cuts that have occurred. 

STO still has growth exposure via PNG LNG T3 and Darwin LNG backfill, but the cost and operational efficiency will be the primary focus area. 

We estimate that the $3.85 entitlement price is equivalent to a US$57 per barrel implied oil price for STO oil is currently trading at $40 per barrel. 

Earnings per share are reduced by 17%, 30% and 38% in financial 2015, 2016 and 2017, primarily due to dilution. 

We retain our Buy call on STO, with valuation reduced by 18% to $5.75/share.

Note this is for the higher risk investor.