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Will Santos be forced to raise even more capital?

Santos Ltd (ASX: STO) has raised $3.5 billion is cash recently, but it could be forced to raise even more.

The funds come from a $2.5 billion capital raising, $500 million as a private placement to a private equity firm and $520 million in proceeds from the sale of a part interest in the Kipper gas field to Mitsui E&P Australia.

The Santos share price has halved so far this year, falling from above $8 in early January and from above $15 in September 2014, as oil prices tumbled.

Thanks to around $9 billion of debt on its books, mainly from participation in 2 giant LNG projects (Gladstone LNG and PNG LNG), Santos was forced to raise capital to shore up its balance sheet.

The oil and gas producer should see revenues start to flow in this year, after PNG LNG and the Gladstone LNG project started shipping LNG to customers (Gladstone LNG in October this year, PNG LNG in May 2014).

Santos has also revised its dividend policy to pay out 40% of underlying profit after tax, and slashed its capital expenditure costs by $900 million in 2015 and capex is expected to fall to $1.2 billion in 2016. A second LNG train (processing facility) at Gladstone LNG is expected to produce its first LNG in the second quarter of 2016.

That should all help the company’s precarious financial position, but after the $3.5 billion of initiatives announced above, Santos will still have $6.2 billion of net debt on its books.

Oil prices are forecast to fall even further, and liquefied natural gas prices are linked to the benchmark oil prices.

Santos says it will be free cash flow positive from 2016 with oil prices at US$50 a barrel and an AUD/USD exchange rate of 70 cents. The problem is that Brent Crude is currently at US$43.84 and the Australian dollar is rising, currently at 73.4 US cents.

Santos is forecasting production of between 57 and 63 million barrels of oil equivalent (mmboe) in 2016. Rough calculations using the current oil price and exchange rate will see the company fall short of its breakeven forecast by between $670 million and $737 million.

Those funds will have to come from somewhere. And oil prices are forecast to fall even lower, which suggests Santos is not over the hump of its problems yet.

The company appears loathe to sell more assets, but selling even a small portion of its 13.5% stake in PNG LNG or its 30% in the Gladstone LNG project could see Santos halve its debt or more. Santos’s stake in PNG LNG is estimated to be worth $6.5 billion, according to The Australian.

Foolish takeaway

Santos is still a high risk gamble, and Foolish investors may want to steer clear.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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