An eagerly awaited Strategic Review from oil and gas producer Santos Ltd (ASX: STO) has hit the ASX boards this morning, revealing a number of crucial changes to the business.
Here're six key takeaways from the company's announcement:
- CEO David Knox is out and current Clough Limited CEO Kevin Gallagher is in (starting early 2016)
- A $3.5 billion reduction in net debt will take place via a number of initiatives
- $520 million will be generated from the sale of interest in the Kipper gas field, located off the coast of Victoria, to Mitsui E&P Australia Pty Ltd
- A $500 million private placement will be undertaken at a 15% premium to the last close price ($5.91) to China-based private equity firm, Hony Capital
- Santos will conduct a $2.5 billion fully underwritten accelerated pro-rata renounceable entitlement offer
- New dividend framework has been introduced
"The $3.5 billion of capital initiatives reinforce the Santos balance sheet and market a significant step towards restoring long term value for shareholders," Santos' Executive Chairman, Peter Coates, said. "We are very confident that the steps taken today will drive better returns for shareholders by strengthening the company's financial position and underscoring the value of its high quality and diverse asset base."
CEO appointment
Mr Gallagher will replace the outgoing David Knox in early 2016, subject to an agreement with Clough Limited. "He is ideally suited to lead Santos as we move from a focus on major strategic developments to delivering strong operational results in a continuing low oil price environment," Mr Coates said.
Previously, Mr Gallagher was an executive at Woodside Petroleum. "Kevin will bring fresh insight and a proven track record," Mr Coates added.
Mr Gallagher said, "I believe the Santos portfolio offers some truly exciting, word class opportunities, irrespective of the current global oil price environment."
Entitlement offer
Eligible retail shareholders will have the opportunity to take advantage of a 1-for-1.7 accelerated pro-rata renounceable entitlement offer. This means shareholders can buy one new share for every 1.7 they currently hold, at an offer price of $3.85 – a 34.9% discount to Santos' closing price. The retail offer will open at 9 am Tuesday 17 November and last until the end of the month. If you don't wish to participate, you can sell your right to buy new shares on the market.
"The Directors believe that it is in the interests of all shareholders to unequivocally strengthen the balance sheet at this time through this issue," Mr Coates said.
Dividend policy
In addition to the previously announced cuts to capital expenditure, Santos said it's committed to, "driving operational and capital efficiency" and has revised its dividend policy. Subject to business conditions, the board expects future payments to be a minimum of 40% of underlying net profit after tax. The final 2015 dividend is expected to be five cents per share.
Foolish Takeaway
Santos shareholders had likely prepared themselves for today's news, with media speculation suggesting the company would either have to raise capital, accept a takeover or sell key interests in some assets. It appears to have done two of those things, and although it has sold a stake to private equity, it's giving shareholders the right to participate in raising more capital.
With Santos shares frozen in a trading halt, investors can expect a lot of volatility in the weeks ahead once it resumes trading.
