Santos to raise up to $2.3 billion to fund LNG plans

Australian oil and gas producer Santos Ltd is raising up to A$3 billion ($2.3 billion) in a deeply discounted rights offer to reduce debt and help fund its portfolio of liquefied natural gas (LNG) projects. Santos, the country's third-largest oil and gas producer, joins a rush of Australian companies that are seizing on a recent rally in shares to tap equity capital markets to overcome difficult credit markets.
The two-for-five rights offer at A$12.50 per share represents a 27 percent discount to its last traded price. It is the biggest share sale by an Australian company since National Australia Bank launched a similar sized offering in November.
"The raising and the size of the offering was certainly a surprise, especially since Santos has said that it has a healthy balance sheet and it didn't look like they needed that much money," said Jason Mabee, an oil and gas analyst at ABN Amro.
Analysts said the size of the discount is likely to result in sttong demand from investors. The institutional component of the offer has been fully underwritten and will raise a minimum of A$1.65 billion, while up to a further $1.35 billion could be raised from retail investors, Santos said in a statement on Monday.
Standard & Poor's Ratings Services said Santos's proposed equity raising supports the 'BBB+' long-term rating on the company and improves Santos' already-strong liquidity and financial flexibility. Santos said it will use just over A$1 billion of the proceeds to fund its share of capital expenditure for an LNG project in Papua New Guinea (PNG) and A$600 million for the redemption of hybrid securities.
Some analysts said Oil Search Ltd, a joint venture partner in the PNG project, might also need to raise cash soon to fund its share of the project's cost after it was hit by a fall in oil prices. Shares in Santos, which were placed on a trading halt pending the capital raising, closed at A$17.09 on Friday. The stock has risen about 15 percent so far this year vs 18 percent rise in the broader S&P/ASX 200 Energy index.
Any additional capital raised will be used to fund its other growth projects, including the Gladstone LNG project in the north-eastern state of Queensland, which is targeting a final investment decision in the first half of 2010, Santos said. The PNG LNG project, operated by US major Exxon Mobil Corp, is expected to cost between $10-$11 billion and will have a production capacity of 6.3 million tonnes of LNG a year when the plant comes onstream in 2014.