Will Santos Ltd be forced to raise billions in capital?

Santos Ltd (ASX: STO) could see its share price plunge again if the company is forced to raise capital (again).

The oil and gas producer is tipped by investment bank Macquarie to raise as much as US$3.5 billion in capital to protect its credit rating. But Santos may need to raise capital sooner rather than later, while its share price is relatively high.

Despite today’s 4.8% fall to $3.81, the Santos share price has gained more than 50% since hitting a 52-week low of $2.46 back in January this year. That was on the back of falling oil prices – which had plunged below US$40 a barrel – an almost unheard of price. 2 years ago, Brent crude oil was consistently trading above US$100 a barrel, but the crashing oil price has pushed may oil and gas companies to the brink and some even beyond.

Brent crude oil is trading at US$47.39 a barrel currently.

Santos took on billions of dollars of debt to meet its obligations for its share of two giant LNG processing plants – PNG LNG – in which it holds a 13.5% interest in conjunction with Oil Search Limited (ASX: OSH) and Gladstone LNG, in which Santos holds 30% and is the operator.

Gladstone cost US$18.5 billion to build, and Santos’s current net debt level stands at US$4.7 billion at the end of June 2016.

Santos was forced to raise $3 billion in late 2015 to shore up its balance sheet, with $2.5 billion raised from shareholders at a price of $3.85 per share. Net debt at the time was US$8.8 billion.

While Santos has also sold off some smaller assets to repay debt, the energy producer could be forced to sell at least part of its share in PNG LNG or its Gladstone LNG project.

Macquarie analysts say oil prices would need to average US$72 a barrel to meet Standard & Poor’s credit targets, or the company could instead raise US$3.5 billion (A$4.6 billion) – while the share price is holding up.

Foolish takeaway

The plight of Santos shows how risky it can be for investors in commodity companies. The initial capital outlays may be huge and there’s no guarantee the company will make a profit over the lifetime of the project, even if it runs for decades.

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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

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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