Santos to Cut Debt by A$3.5 Billion Amid Rout in Oil Prices

  • Santos plans to sell A$2.5 billion stock to shareholders
  • Mitsui buys Kipper gas field holding for A$520 million

Santos Ltd., the Australian oil and gas producer that rejected a takeover bid last month, plans to raise A$3.5 billion ($2.5 billion) selling shares and a stake in a gas field as it seeks to cut debt after the plunge in energy prices.

The company, which also named Kevin Gallagher to replace David Knox as chief executive officer, will sell A$2.5 billion of shares to existing holders at a 35 percent discount, Adelaide-based Santos said Monday in a statement. It will raise A$500 million in a separate sale to Hony Capital, a China-based private equity firm, and A$520 million selling part of the Kipper gas field to a unit of Mitsui & Co.

Santos, operator of the $18.5 billion Gladstone gas development on Australia’s east coast, joins producers including Origin Energy Ltd. in moving to shore up its balance sheet. Brent crude’s decline of more than 40 percent over the past year to less than $50 a barrel is cutting revenue for natural gas-export projects whose contracts with Asian buyers are linked to the price of oil.

“This will be stabilizing for Santos,” Evan Lucas, a market strategist at IG Ltd. in Melbourne, said by phone. “There is still the issue of their big tier-one project, being Gladstone. It’s a beautiful project at $100 a barrel. It’s OK at $75. At sub-$50, it’s a problem.”

Santos, which spurned the $5.2 billion takeover attempt by Scepter Partners as too low, had also received a binding offer of about A$1.5 billion from Quadrant Energy Pty for oil and gas fields the companies jointly own in Western Australia, people with knowledge of the matter said last month. Santos had total debt of $9 billion as of June 30.

Buyer Interest

Under the A$2.5 billion offer, shareholders are entitled to subscribe for 1 new Santos share for every 1.7 existing shares at A$3.85 apiece, the company said. Hony will acquire about 74 million shares at A$6.80 a share, or about 15 percent more than Santos’s closing price of A$5.91 on Nov. 6.

“We are very confident that the steps taken today will drive better returns for shareholders by strengthening the company’s financial position,” Executive Chairman Peter Coates said in the statement.

Santos expects interest in its assets from potential buyers will continue and will sell only “where there is a compelling value case,” the company said. Santos also intends to set dividends as a payout ratio of earnings, expected to be a minimum of 40 percent of underlying net profit after tax, according to the statement.

Gallagher, currently the CEO of engineering services company Clough Ltd., aims to take over early in 2016, Santos said. Knox, who has been CEO since 2008, announced his intention to resign earlier this year.

Before it's here, it's on the Bloomberg Terminal.