Santos shares have dropped to a 10-year low after the oil and gas producer's credit rating was downgraded by Standard & Poor's, which warned another cut was possible if oil prices remain low and the large GLNG project in Queensland suffers an unanticipated cost over-run.
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The stock, which had already lost one-third of its value over the past two weeks on the slump in crude oil prices, dropped 8 per cent to $7.64 at 12.39pm AEDT. They earlier dropped over 10 per cent to $7.46, the lowest since October 2004.
Santos is now reliant on smoothly completing and bringing into production its $US18.5 billion ($22.4 billion) GLNG liquefied natural gas project in Queensland to avert the risk of a further cut in its credit rating in the current weak oil price environment, according to analysts
The oil and gas producer's credit rating was downgraded late Monday to BBB from BBB+ by S&P, which made it clear the risk of a further cut, to BBB-, the lowest investment grade, still remained by keeping it on negative outlook.
A Santos spokesman noted the rating cut and added that the company's financial position had not changed.
"None of our existing debt facilities contain any credit rating related covenant triggers or review events," the spokesman said.
JPMorgan analyst Benjamin Wilson said the downgrade had been overdue and possibly should have come in mid-2013 when the 100 per cent equity credit allotted to hybrid securities ended.
He noted that in the absence of action such as the sale of hybrid securities, underwriting of the dividend investment plan or a cut in the dividend, the new BBB rating would be at risk if oil prices were to average below $US75 a barrel or the Australian dollar above US85¢ over the next three years.
S&P "says a successful ramp-up of the GLNG project is key to maintaining the BBB rating", noted UBS analyst Nik Burns.
The reduction in the rating came after S&P last week cut the oil price assumptions it uses to assess the creditworthiness of companies, by $US5-$US10 a barrel.
But its new assumptions, for Brent to average $US80 in 2015 and $US85 in 2016, are still well above prices indicated in the forward curve.
Brent crude oil, which was at $US115 a barrel as recently as June, dropped another 4.3 per cent on Monday to $US66.08. NAB credit analysts still described S&P's decision to cut Santos's rating as "somewhat surprising".
"The heavy oil price falls recently have clearly caused S&P to take this action as pressure is placed upon earnings and cash flows just as the sizeable capital expenditure for the completion of its GLNG project is required," they said.
"Last week's postponement of the planned Euro hybrid won't have aided matters either."
Mr Seaton last week participated in a Santos road show in Europe for a potential €500 million issue of hybrid securities, before the company announced on Thursday that conditions were not conducive for the sale, which would be deferred.
It said it has "no current intention" to carry out an equity raising and said it would significantly reduce capital and operating expenditure in 2015.
Santos is coming into the last phase of spending for the GLNG project, which has been under construction for almost four years and is due to begin production in the second half of 2015. But the drop in crude oil prices has reduced the expected upsurge Santos will see in its cash flows once exports start up.
"We expect that the company's credit metrics would be weak for the BBB rating in 2014 and 2015 due to the large capital expenditure required to complete its GLNG projects," said S&P credit analyst Craig Parker.
NAB noted that "the tone and content of S&P's downgrade does not appear to offer much upside prospect at all to the new rating in the near to medium term".
