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Is Santos Ltd the new Newcrest Mining Limited?

The relentless selling of shares in oil and gas producer Santos Ltd (ASX: STO) is clearly linked to the plummeting oil price, but now there is also a new reason for investors to worry. Debt.

Over the last week Santos has scrambled to reassure analysts and investors it has enough capital to ride out the storm. On two separate occasions the company has released the same quote by chief financial officer Andrew Seaton stating: “Santos has a robust existing funding position, including approximately A$2 billion in available liquidity.

Why the reassurance?

Big growth does not come cheap in the energy industry and Santos’ capital intensive projects have contributed to a $6.429 billion pile of interest bearing debt (short and long term as of 30 June, 2014).

Obviously the falling oil prices will have a savage impact on cash flows for the company. The falling energy prices have raised investor concerns over the cost of servicing debt and the sustainability of dividends.

This was made worse by a down-grade to Santos’ credit rating from BBB+ to BBB by Standard & Poor’s.

Santos yesterday announced a prudent 25% reduction to planned 2015 capital expenditure. In effect a reduction of $700 million to try and ease fears.

Sound familiar?

If this all sounds familiar, perhaps it should. The rapid commodity driven fall is similar to that faced by major gold producer Newcrest Mining Limited (ASX: NCM). Shares in Newcrest were slashed 61% in value between October 2012 and October 2013 as gold plunged, burning plenty of investors in the process.

Like Santos, Newcrest was then down-graded while also desperately cutting back capital expenditure to preserve cash. Newcrest’s low-cost operations helped to keep it ahead of the falling gold price, but not before writing off billions of dollars of assets.

Newcrest is also burdened with a large percentage of debt, with the company’s gearing rising to 33.8% as at 30 June, 2014.

Is Santos different?

The clear difference between Santos and Newcrest is the commodity involved. While strengthening economies have kept the price of gold down over the last year, the big question is whether the demand-supply pressures driving down the price of oil will recover over the medium term or continue to drag out.

Santos appears adequately positioned to meet its current operating requirements, but will need to see a reversal in oil price to reassure investors.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned.

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