THIS week S&P Global Ratings said Santos has a “solid buffer” to withstand the low oil price thanks to its good work building the balance sheet these past three years while it also put Woodside Petroleum on a watchlist for a possible ratings downgrade.
Santos closed higher than its peers yesterday on the ASX, seeing a 20% rise in its share price compared to an overall energy sector rise of around 5%, helped along by S&P's afternoon release.
"The company's recently announced measures to preserve cash should support the key ratio of funds from operations (FFO) to debt at between 20% and 25%" by the year's end," S&P said.
That forecast takes in its price assumptions of $30/bbl oil for the rest of 2020, $50/bbl oil next year and $55/bbl oil in 2022.
After the 2015-2016 price slump that sent the oiler into the red it "emerged with a more resilient business model," it said.
"We believe Santos' production portfolio will outperform peers in a lower oil price environment, given that about 30% of Santos' production is domestic gas linked to the consumer price index."
In addition, about 15% of the company's oil-linked liquefied natural gas portfolio will benefit from hedging at oil prices of below US$54/bbl over the next nine months."
It helps that the company's LNG through 2020 is 95% contracted largely to South Korea and Malaysia.
S&P also likes that the Adelaide company will reduce free-cash flow breakeven price to $25/bbl this year, part of a suite of moves announced by Santos Monday to survive low oil demand and even lower prices. It also committed to reducing capex by 38% this year.
"In addition, some LNG price structures provide relief against a significant oil price drop, given the existence of LNG 'S' price curves, whereby oil price-linkage flattens at currently depressed prices," S&P said.
While many contracts are up for price reviews the "scope for change is limited by contract terms," Santos chief Kevin Gallagher said some months ago.
Santos also committed to delaying sanction for development of its Barossa gas field, which S&P sees as prudent.
"We believe growth projects sanctioned in the current environment would indicate a heightened risk appetite, and would likely be negative for the company's credit profile," it said.
Meanwhile this week it placed Woodside Petroleum on CreditWatch Negative suggesting "under our current oil price assumptions, including US$30 per barrel oil in 2020, we forecast that forecast funds from operation to debt could materially breach 30% in 2020 and thereafter, should the Scarborough-Pluto integrated project proceed.
"We may lower the rating by at least one notch if Woodside is unwilling to take effective and timely actions to preserve its financial profile amid the significantly depressed oil and LNG markets and funding requirements associated with the Scarborough-Pluto LNG project."
Source: Energy News Bulletin
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