Santos Ltd's (ASX: STO) Share Purchase Plan ("SPP") opened to ordinary shareholders today. Shareholders can apply for up to $15,000 worth of Santos shares – subject to possible scale-back – at a price of $4.06 per share. The SPP is not underwritten, meaning that if shareholders elect not to buy the shares, there's no underwriter guaranteeing that those shares will be purchased.
Eligible shareholders have until 31 January to apply, an unusually long application period, possibly due to the holiday season. This is also effectively a good short-term 'option' to pick up Santos shares at a discount, should the share price rise above the $4.06 offer price – bearing in mind the current share price is $3.96.
What's the money for?
'New Santos' were the words used by a management team that wants to focus on five core assets, boost output and lower production costs. It's a turnaround story, with management needing the new capital to reinvest in their core assets as well as a 'focused exploration strategy'. The offer document that was sent out to shareholders is quite light on information, and I recommend all interested shareholders read the recent announcements on 14 and 8 December before making a decision.
Non-core assets will be packaged up and run as a separate business unit and, although they haven't mentioned the words 'spin-off', I suspect these assets could be sold as a separate company. Origin Energy Ltd (ASX: ORG) is following the exact same spin-off strategy with its non-core assets, and I imagine Santos will play its cards close to its corporate chest while it waits to see how Origin's proposed Initial Public Offering (IPO) is received by the market.
Should you participate?
Only if you want more Santos shares – but then you might as well buy them on the market at a discount. Santos' strategy makes sense in terms of unlocking value for shareholders, but it comes right at a time when the company was supposed to be seeing a decline in expenditure and higher free cash flows due to the completion of its GLNG project. Low oil prices put a stop to that, and the company is sensitive to changes in the price of oil.
$3.5 billion in new shares have already been minted for the company in the past two years. Despite the stronger balance sheet and 'New Santos' project it is hard to imagine Earnings Per Share going anywhere in the next few years, with so many new shares on issue. I'm not that excited by the proposal, and probably would not participate if I were a shareholder.
