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Santos Ltd. Outlook Revised To Stable On Proposed Equity #BBB-/A-3# Ratings Affirmed

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MELBOURNE--16 Dec--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Dec. 16, 2016--S&P Global Ratings said today that it had revised the rating outlook on Santos Ltd. to stable from negative. At the same time, we affirmed the 'BBB-' long-term and 'A-3' short-term corporate credit and issue ratings on Santos Ltd. and the company's related debt.

"The outlook revision reflects our view that Santos' financial profile will improve following the company's proposed equity raisings," said S&P Global Ratings credit analyst Craig Parker.

The company will raise A$1,040 million equity from new and existing institutional shareholders, which represent 15% of Santos' issued capital. Furthermore, Santos proposes to raise up to an additional A$500 million equity from its retail shareholders, although this is not underwritten and, therefore, less certain. The amount of this additional equity raising will be known in late January 2017.

The equity raisings demonstrate the company's commitment to maintaining the 'BBB-' rating. The A$1,040 million equity raise would enable the company to improve its credit metrics to levels consistent with the 'BBB-' rating. This would include the company's funds from operations (FFO)-to-debt ratio reaching about 25% in the year ending Dec. 31, 2017, before further improving in fiscal 2018. The addition of up to A$500 million of equity will further strengthen Santos' capital structure, albeit it is not underwritten and less certain.

Santos forecasts that its production would reduce to between 55 million and 60 million barrels of oil equivalents (mmboe), down from between 60 and 62 mmboe in 2016. This reduced production guidance is due to the impact of asset sales (about 2.5 mmboe reduction), combined with natural field declines. Partially offsetting this decline is the company's higher forecast LNG production from Gladstone Liquefied Natural Gas (GLNG) facility and Western Australia gas production. The company has also been cutting its cost base, with the free cash flow breakeven oil price now at US$39 per barrel, down from US$47 per barrel at the start of 2016.

However, risks remain for the operations of the GLNG plant, with the plant recently making a US$1,050 million after-tax (US$1,500 million before tax) impairment charge. This is because it needed to acquire significant gas volumes from third-party sources over the life of the project to supplement long-term supply from the GLNG joint-venture gas fields. Constraints on capital expenditure have slowed the ramp-up of production of GLNG equity gas. The low oil price environment has also led to reduced availability and anticipated higher prices for gas. As a result, the company has turned to higher-priced, uncontracted, third-party gas over the life of the project.

We expect that the GLNG asset will generate robust earnings in the long term. However, if the GLNG investment does not perform to the company's expectations, it could have an impact on Santos' competitive position.

Mr. Parker added: "The stable outlook reflects our expectation that Santos' credit metrics will improve over the next 12 months due to its equity raisings and additional production from the GLNG project. As a consequence, we expect that its ratio of FFO-to-debt will be about 25% in 2017 and remain within a 25%-30% range over the near term."

Assuming Santos' competitive position remains stable, we would lower the long-term rating to 'BB+' if we believed that Santos' ratio of FFO-to-debt could remain less than 25% over the next 12 months.

This could also occur from one or a combination of:continued deterioration in oil prices that causes the group's financial risk profile to sustain outside ratings tolerances for an extended period; operational underperformance particularly from the GLNG project;further debt-funded investment; oroutspending its internal cash flows by developing large projects.

The rating could also be at risk if Santos undertakes material asset sales that weaken its competitive position, unless such weakening was compensated by a corresponding strengthening of the company's financial position.

We consider an upgrade less likely.

However, it would be dependent upon the group delivering cost-competitive production, while operating with more-conservative financial metrics that would act as a buffer to future development of large projects and volatile oil prices.


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