- Discounted stock offerings favored over M&A approaches
- Santos to sell A$3 billion in shares after rejecting Scepter
In the Australian energy industry, selling billions of dollars of shares, even at a significant discount, beats accepting low-ball offers from predators.
Australia’s oil producers and utilities are on track to sell almost $5 billion in new shares this year, the most in at least six years, as they seek to shore up balance sheets amid the rout in oil prices, according to data compiled by Bloomberg. Santos Ltd., which last month rejected a $5.2 billion takeover bid from Scepter Partners, said Monday that it plans to sell about A$3 billion ($2.1 billion) in stock.
“If this was the bottom of cycle you would expect a lot more M&A, but what we’re seeing is more of these types of deals, companies raising equity,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said by phone. “There seems to be a big disconnect between what buyers are willing to pay and what sellers want to get.”
Santos and Origin Energy Ltd. are starting two separate liquefied natural gas projects on Australia’s east coast at a time when oil -- and the companies’ share prices -- are sliding. Oil’s decline of more than 40 percent over the past year is cutting revenue for the gas-export projects whose contracts with Asian buyers are linked to the price of crude.
The collapse in oil prices came just as $60 billion in new export projects were due to start up in Queensland. With much of the construction funded by debt, the balance sheets of Santos and Origin were doubly stretched. Santos’s net debt blew out to A$8.6 billion as of June 30 from A$616 million three years before, Origin’s climbed to A$11.6 billion from A$5.5 billion.
Santos’s project started output in September. Origin said at the end of October it expected production to start within a month.
‘Had to Happen’
A wave of new supply from Australia to the U.S. is deepening a glut of gas, raising the risk of losses for exporters and prompting some buyers to look at breaking contracts with suppliers, according to a report last week from Goldman Sachs Group Inc.
Santos plans to sell A$2.5 billion in shares to existing holders at A$3.85 per share. That’s 35 percent less than its closing price of A$5.91 on Nov. 6. It’s also selling A$500 million in shares in a separate placement to Hony Capital, a China-based private equity firm.
Origin announced at the end of September the sale of A$2.5 billion in shares at a similar discount in a bid to reduce debt. The new Origin shares were trading at about 35 percent more than the offer price of A$4 a piece as of Nov. 6.
“This had to happen because their balance sheets were so stretched,” Evan Lucas, a market strategist at IG Ltd. in Melbourne, said by phone. With the plunge in oil prices, “nobody saw how hard, how fast and how savage it would be. If they want these assets to work they need to show they can be sustainable through the down period.”
Santos said Monday it also plans to raise A$520 million selling part of the Kipper gas field to a unit of Mitsui & Co. The Adelaide-based company, which has been fielding interest in its assets from potential buyers, isn’t under pressure to sell further holdings, Executive Chairman Peter Coates said in the statement.
“The sellers are looking at the recovery and the upside,” Beveridge said, “and the buyers are saying, at current prices this really doesn’t make much sense.”