Is Santos Ltd (ASX: STO) finally emerging from its long dark tunnel? The stock has surged 4% to $4.14 in lunch time trade after its peer Origin Energy Ltd (ASX: ORG) announced a $2.5 billion equity raising to ease its heavy debt burden.
Short sellers might be taking some profit on Santos as the oil & gas company is likely to follow Origin's move in the coming week or two as it too struggles with similar debt and capital expenditure issues as both companies are trying to get their massive separate liquefied natural gas (LNG) projects in Queensland up and running.
Santos has been strongly resisting calls for it to sell new shares to bolster its balance sheet and that has made it a target for short sellers as these traders anticipate that the stock will be under pressure until management acquiesces.
Short sellers borrow stock to sell on market in the hope of buying it back at a lower price later to profit from the difference. If short sellers are closing positions, they will drive up demand for the stock and that usually supports the company's share price.
Santos said it would rather sell assets instead of shares, but as I wrote two weeks ago, asset sales are unlikely to raise enough cash with Santos needing more than $2 billion.
Coincidentally, UBS believes that Santos needs at least $3 billion and believes that Santos will want to retain all, if not most, of its 13.5% stake in PNG LNG project – which is the jewel in its crown.
What is also complicating the cash raising effort is the fact that Santos probably won't get a fair price for its other assets as buyers know it is a distressed seller.
This means Santos will probably have to undertake a capital raising AND sell some non-core assets as this is probably the best way for Santos to get a big enough cash injection to achieve a market re-rating.
The amount of new shares it needs to sell and the discount it has to offer to attract investors is largely dependent on its asset sale program, but if Santos sells shares at a similar 34% discount to Origin Energy, it will mean selling shares at $2.65 a pop.
That's a pretty steep discount but that's probably the only way for Santos to ensure the success of its equity raising.
Short sellers may be happy to take some profits today but I think it is still too early for retail investors to buy the stock. I would wait for Santos to announce its capital raising first as the stock is likely to dip on the news. I will then look to buy a position.
Meanwhile, Oil Search Limited (ASX: OSH) shareholders hoping for a higher bid from Woodside Petroleum Limited (ASX: WPL) might need to be more patient if Macquarie is right.
The broker thinks Woodside is in no rush to up its $11.6 billion bid and will wait for a competing bidder to step out of the shadow before sweetening its offer.
Woodside is also believed to be having a detailed look at Santos' stake in PNG LNG, which is 29% owned by Oil Search.
