From Macquarie today on STO:
Equity proves the last option: Despite months of speculation surrounding possible asset sales and significant interest in individual assets (most notably PNG LNG), STO’s decision to only sell Kipper for A$520m to Mitsui perhaps highlights that the actual bids fell well short of the consideration recently reported by the press (including A$1.5bn for WA gas assets and >A$1bn for a 3.6% stake in PNG LNG). Given the limited depth of asset sales, at A$3bn the call on fresh equity is perhaps larger than we had originally anticipated with the discount also wider. That said the Board’s decision to thoroughly investigate asset sales first before rushing into an deeply discounted rights issue at the time that the strategic review was announced (when the share price was touching lows of A$4/sh) has seemingly preserved some value.
Restoring the credit rating, but not necessarily the balance sheet: S&P re-affirmed its BBB rating, with FFO/ND expected to consolidate to ~40% assuming S&P oil price deck. However, while pro-forma Jun-15 ND/ND+E gearing falls to ~29%, a combination of a A$800m fx revaluation on USdenominated debt and forecast net cash outflows for 2H16 of A$250m is likely to see gearing return to 35%, which still remains at a fairly high level. Indeed the possibility of an asset impairment at the upcoming 2015 full-year results could potentially impacting equity further, seeing ND/ND+E gearing quickly move back to ~40%.
Valuation still compelling, but requires higher oil prices: After adjusting for the deeply discounted entitlement issue STO still offers 36% upside to our revised A$7/sh target with TERP at a 37% discount to our revised risked NAV. Furthermore STO is still trading on a 2016 and 2017 FCF yield of 11% and 20% respectively. That said, assuming the more conservative forward curve our revised NAV falls to A$5.85/sh representing a mere 13% premium to TERP with the 2017 FCF yield falls to 13.6%. Consequently, while existing shareholders will likely find the discount compelling, the valuation proposition for new shareholders is perhaps less clear.
The STO balance sheet is not “fixed”. It’s been inoculated against imminent death is all and is still a zombie firm. Finally an IB that gets an LNG balance sheet
