Will Santos Ltd announce a capital raising?

Santos Ltd (ASX:STO) is fast tracking asset sales and could book over $1 billion in deals to stave-off a capital raising.

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Takeover fever from Woodside Petroleum Limited's (ASX: WPL) bid for Oil Search Limited (ASX: OSH) has fired up the share price of Santos Ltd (ASX: STO) at a time when the embattled oil & gas producer is looking to shed assets to stave-off a dreaded capital raising.

Shares in Santos surged 10.3% to $4.62 in early trade on the takeover news, which is fueling hopes that the sector may have found its feet after enduring a punishing 12 months as the price of oil halved.

Santos has been a favorite among short-sellers because it's seen to be the most vulnerable to collapsing energy prices as its balance sheet has been weakened by a massive investment in the $US18.5 billion GLNG project, which is coming online later this month as the price of liquefied natural gas (LNG) is slumping deeper into bear territory.

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.

The energy company is fast tracking its asset divestment program and will likely announce some sales later this month, according to reports in The Australian.

It is believed that Santos has received indicative bids worth over $1 billion for some of its assets, which are within an acceptable price range to the company, after it set up a data room for potential buyers. It is too early to say how much Santos can get.

The cash will certainly come in handy but I am not sure if it will be enough given that Santos has around $9 billion in debt when its market cap stands at $4.8 billion.

It's currency and commodity prices that are working against Santos. The company's debt is denominated in US dollars and the surging greenback had increased its debt burden by $364 million when management reported its half-year result last month.

It is also believed that Santos will need the Brent crude oil price to range between $US45 and $US50 a barrel for it to be cash breakeven after paying interest costs.

The price of Brent has tumbled to $US47.93 a barrel and is threatening to go lower after Russia rejected calls to work with the Organisation of the Petroleum Exporting Countries (OPEC) to curb production.

This is why I believe the bounce in Santos' share price should be seen as a selling opportunity because short-sellers are more likely to see the price rally as a chance to increase their position against the company on the belief it cannot avoid selling shares at a deep discount to its current share price.

It will be a bruising experience for shareholders if Santos was forced to sell new shares to raise cash in the current market as the stock is hovering close to a 15-year low, but this is exactly what it might take to turn the stock around.

Most short-sellers will likely close positions and book profit when management throws in the towel on the equity raising front.

Management doesn't want to give short-sellers the satisfaction of being right, but hubris comes at a high cost.

Motley Fool contributor Brendon Lau owns shares of Oil Search Limited and Woodside Petroleum Ltd.. Follow me on Twitter - https://twitter.com/brenlau 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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