Better late than never:
STO and ORG are still impacted by balance sheet stress
We believe Santos (STO) and Origin Energy (ORG) currently experience the greatest balance sheet stress among our LNG coverage (primarily from low oil prices). Both carry excess debt for this point in the oil cycle, driving not only credit rating pressure (STO more so than ORG) but also increased reliance on undrawn bank facilities. With 4% downside to our 12m TP (vs. 9% average upside for our Australia energy coverage), we downgrade STO to Sell (from Neutral). STO has greater oil price leverage (i.e. no Utilities business) and hence less ability to sustain debt levels, in our view. For those looking to invest in the CSG-LNG space, at these levels we prefer ORG (Neutral) over STO (Sell).STO – unhedged cash-flow, but significant headroom and duration
STO had c.A$4.8bn of cash & undrawn debt (if A$520mn Kipper proceeds accounted for) as at Dec-2015. STO has c. A$1bn debt maturities through 2015E-17E (excl. sub-note, which does not require refinancing near term), with larger maturities (>A$3bn) in 2018E-19E. We expect STO to cut domestic capex further to lower its FCF breakeven (c. US$37.50/bbl by
2017E). STO’s LNG contracts are diversified and liquidity adequate – but if spot oil prices were to persist, STO may exhaust liquidity in c.7-8 years. If some undrawn debt lines were withdrawn or renegotiated by banks (e.g. on impairments etc.), this could potentially bring it forward. We expect STO to pursue more dilutive deleveraging in 2016E – Sell.ORG – APLNG offtake a key issue; hedging eased rating pressure
Following ORG’s October equity raise (A$2.5bn) and its Contact divestment (A$1.4bn), we estimate it should have access to >A$6.5bn of cash and undrawn debt (then <A$1bn maturities in FY17 and FY18) as at 31-Dec-15. ORG’s FY17 hedging (effectively buying JCC puts at c.US$39/bbl for much of its APLNG exposure) has reduced near-term cashflow risk and assuming no major APLNG cash injections we expect ORG’s FCF to be strong in FY17 (GSe A$1.1bn). Offtaker risk remains a potential concern. Neutral.
Yes, ORG hedges were a very good idea but I can’t see it traveling much better than STO as the global oil shake out turns earth moving. The contract risk is enormous.
