Reference no: EM131063454

Santos shelves debt raising in oil price rout

Tweaking the money tap: Having postponed a debt raising, Santos will review its spending plans for next year.

Energy producer Santos has been forced to postpone a €500 million ($733 million) hybrid debt raising in Europe and will slash capital and operating expenditure following a slump in oil prices below $US70 a barrel.

Chief financial officer Andrew Seaton said the company had decided to defer any hybrid issue until market conditions improve, noting the oil market had experienced volatility following the decision by the Organisation of Petroleum Exporting Countries not to cut output at a meeting in Vienna late last week.

Mr Seaton said Santos holds a "robust" funding position with $2 billion in available liquidity, but will review its spending plans for 2015. Santos already has outstanding hybrid capital securities in the European markets. But the yields on the securities have come under pressure after the company flagged plans to issue more securities as oil prices plunged.

The yield on the securities has spiked by an enormous 40 per cent in two trading sessions to almost 5 per cent from 3.5 per cent at the start of the month.

While the outright yield may appear to suggest a low cost of funds, the costs associated with converting the funds into Australian dollars and hedging the currency risk would have pushed the overall costs higher.

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" .

The lower oil prices, if they persist, would eat into a forecast jump in Santos's cashflows from its two, big-ticket LNG projects, a venture in Papua New Guinea that started production earlier this year and the $US18.5 billion ($21.5 billion) GLNG project in Queensland set to
begin exports in the second half of 2015.

An earlier estimate by Santos that operating cash flows would double from 2013 to 2016 assumed oil prices of $US100 a barrel.
But consensus estimates for crude prices have been pared back, to $US90 a barrel, reducing the expected lift in Santos's cash flows to
65 per cent by 2016.

Brent crude prices are currently much lower than that, at about $US69.

a) Analyse Santos' short term liquidity based on 2013 and 2014 financial figures.

b) What is a convertible bond and why is it a hybrid security?

c) In 2014 is Santos financing using predominantly long-term or short-term debt? Are they using predominantly direct or indirect debt financing? Why? What currency are they predominantly borrowing in? Refer to Source 1.

d) Analyse the asset management, debt management, profitability and market expectations for Santos in 2014 as compared to 2013. (Hint: Use financial and market data in your ratio calculations and make sure to interpret and analyse the output)

e) According to the Sources above what has happened to the yields on Santos hybrid securities (convertible bonds) in 2014-15? Why has this happened? How would it affect the price of its existing bonds today?