Santos has lost a third of its market capitalisation in the past two weeks as the price of oil has crashed and concerns mount about its ability to fund its $20 billion (K42.34 billion) Gladstone LNG project in Queensland. Standard & Poor’s last night cut Santos’s credit rating from BBB+ to BBB, citing the severe decline in oil prices and the "sizeable" capital expenditure still needed to complete the GLNG project.
The downgrade comes only days after Santos was forced to scrap a large capital raising of hybrid bonds it had planned to market in Europe. The ratings agency also warned that another cut was possible, stating that the long term outlook for Santos remains negative.
"In our view, a successful ramp-up of the GLNG project is key to maintaining the BBB rating," Standard & Poor’s credit analyst Craig Parker said. The move follows Standard & Poor’s decision to cut the oil price forecasts it uses to model producers’ credit worthiness.
It cut its forecasts for Brent crude from $US90 (K231) a barrel to $US80 (K205.6) a barrel next year, and to $US85 (K218.5) a barrel beyond 2016. Santos issued a statement to the ASX this morning stating that its finances were not affected by the downgrade.
The company’s chief financial officer Andrew Seaton noted that Santos still retained an investment grade credit rating. A BBB rating is two notches above non-investment grade BB - or junk bond - status. "Santos has a robust funding position, with approximately $2 billion (K4.23 billion) in cash and undrawn debt facilities available as at November 30, 2014," Mr Seaton said.
However, analysts have questioned whether that is enough to stave off further downgrades. Credit Suisse analyst Mark Samter said that, while $2 billion seems a large number, Santos still has real liquidity risks arising again soon.